The benefits and Downfalls of Negative Gearing

The benefits and Downfalls of Negative Gearing

 

One of the biggest hurdles in purchasing the first investment property is getting your head around the fact it may be “losing” money every week. What is called negative gearing is the fact the cash flow of the property is negative-Its holding costs are more than the rental income. This may be the first and biggest stopping point for many.

 

However it’s simply the nothing more than the cost of doing business short term. If your $300,000 property was to double in value in ten years (assuming the traditional cycle time), would you look back and stress about the $5000 in the first year, $4000 in the second year it may have cost you initially? I’m in no way saying that it is insignificant because it is very when it comes straight out of your wages or income!!

 

If you worked out how much per week your investment property grew in value per week by doubling every ten years I’m sure it would far out way the short term negative gearing.

 

There is really only one benefit to negative gearing-Tax deductions.

An income-producing asset (rented investment property) that has negative cash flow is allowed tax deductions that can be passed on to your personal tax return.

 

Example

 

$300k Property

 

Expenses (p/a)

                Loan Interest = $21,000

                 Rates            =$2,100

                 Management=$1,165

                 Insurance      =$600

                 Maintenance =$500

                 Accounting   =$400

 

Total                              =$25,765

 

Income

               Rent               =$17,160

 

Shortfall                       =$8,605          =$165 per week

 

Property Doubles in ten years             =$576 per week

(600k – 300k = 300k / ten years/52 weeks)

 

So by thinking short term is not really that beneficial in term s of building up a sizable portfolio. Managing your cash flow from day one when its negatively geared can only teach you good habits on how to budget well and will set you in good stead for in time when the rent does double and the cash flow is in fact positive! You are only buying time in the market to hold your hopefully appreciating asset.

 

Still doesn’t seem like you can afford it? Just think- What else do I spend my money on that goes up in time with being able to borrow with such great leverage like investment property?

Credit cards? Holidays? Cars? Clothes?

 

Need help calculating your borrowing cash flow?  Contact Us Here for your help.

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