Michael Quinn 21 February 2017 News

Positive and Negative Gearing What are they and which one should you aim for?

Having owned x 7 Negatively Geared properties and our own home with interest rates at 9.2%, I feel very qualified to comment regarding negative and positive geared properties.

Firstly, in layman terms, what is negative gearing and positive gearing?

A negative geared property means that after all income (rent) and total costs, depreciation and tax deductions are taken in to account, the property is costing you to hold each week after tax. Depending on the property, this could be costing you $50 p/week – $150p/week whilst providing you with $30,000 – $40,000 in tax deductions.

Your costs include interest on loans, property management, insurances, council rates, purchasing costs of stamp duty and legal fees. After depreciation and tax deductions, the property is costing you to hold.

Yes, you are wanting capital growth and better said, compounding capital growth with your property portfolio over time, yet I do feel that if you are able to achieve neutral or positively geared property then this can be a lot more attractive as positive cash flow does not drain you (as x 7 negatively geared properties did).

A positively geared property is one that after all income/rents, costs, depreciation and tax deductions are calculated, a positively geared property is then delivering a cash flow positive figure each week after tax. This may be + $30 p/week to + $150 p/week.

Please note that in both negative and positive geared properties, you are taking advantage of all allowable depreciation and tax deductions, it is just that the end figure is either costing you or is cash flow positive after all is calculated.

Of course a big influence with this is interest rates and we need to remember that the “normal” for interest rates is around 7.5% and yes, I do think our current record low interest rates will be with us for some time yet (perhaps the next few years), and they will rise/cycle – as do rents that follow interest rate rises.

Please be wary of the “media hype” that will come with interest rate rises (as interest rates rise to slow down growth, and we want growth).

Also, ensure that you have a proven “A” team in place with your advisors as modelling your numbers as doing nothing will produce just that.

Ideally, I recommend having neutral or positively geared properties, as they do not drain you or your cash flow.

Be wary of the “high return” as with high return, this also comes with high risk – remember to keep it safe and affordable.

The political debate of negative gearing is a huge one, the reason the government gives us tax deductions and depriciation on investment property is that they can not afford to make up for the huge undersupply of housing (especially with population growth in capital cities) – this is why they give us these deductions as we are paying for the housing.

As history shows, Paul Keating abolished negative gearing (for about 18 months) and this all but stopped the housing industry – large lessons got learnt and we need properties for Australians to live in.

I recommend you bring it back to the numbers – your numbers, keep your powder dry for your next move and do not place yourself under financial stress.

Enjoy the experience and the rewards over time.

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