If you are interested in the real estate market or just have a basic understanding of property investment strategies you’ve probably heard the term “negative gearing”. Essentially negative gearing is a way of offsetting the losses someone may have from owning an investment property. If the income such as rent from the property is less than the cost of owning and maintaining it then you can claim the losses against your tax.
The flip side of negative gearing is positive gearing, which is where your income from an investment property exceeds your costs from owning and managing it. While you do not get the benefits of having losses for tax purposes, you do have the advantage if owning a profitable investment that will also grow in value over time. Just remember that any profits either from annual income or when you come to sell the property you do make may be subject to tax.
Most people do not decide to buy an investment property with the aim of losing money in the long-term, and for many investors a positively geared property where the rental income covers all their costs is their strategic goal. Property experts are divided in their opinions on whether negative or positive gearing is a better long-term strategy for investors – some say that it is better to pay tax on a profit than relying on a tax deduction every year. The problem with positive gearing is that it means that either investors have been able to contribute a large deposit when purchasing the property (or bought the property outright) and have low mortgage and interest costs, or they can charge enough rent to cover those costs. These are relatively rare circumstances for the large majority of investors with a residential property investment.
Depending on your individual investment strategy there are a few ways you can ensure that you are getting the best return on your property and building genuine equity for the long-term. These include:
- Researching the areas such as inner city suburbs that are most likely to provide solid capital gains over a 10 to 15 year period
- Doing thorough due diligence on the type of property you want to buy: for example, off the plan properties may provide higher rental income once they are completed and could compare favourably with an existing apartment or detached house in terms of growth.
- Getting assistance and support when buying an property from investment experts – local “on the ground” knowledge and experience can make all the difference in starting a successful property portfolio or buying property that becomes a drain on your finances and causes you stress.
- Having a sensible budget and your finances worked out before completing the purchase of a property.
Finally, building equity in your residential property investment by accelerating mortgage payments can help you to move from a negative gearing position to one where you are actually making a profit each month. Having high levels of equity in an existing property can also help you to purchase further investment properties as part of a long-term wealth creation strategy. If you are interested in finding out about other successful property investment strategies or how you could build the sustainable and profitable property portfolio you’ve always wanted contact investment experts Ironfish today!