Property investment is a long-term wealth building strategy that requires planning. In order to get the most out of your investment property, you need to set up an investment structure that will benefit you in 10, even 20 years time. To do this, you’ll need to understand the concept of negative and positive gearing.
What is Negative Gearing?
When the expenses on your investment property are higher than the income the investment generates, it is negatively geared. To illustrate, if you have a property that receives $400 per week in rent, but costs you $375 in mortgage repayments and $100 in management costs, your investment could be negatively geared.
In this case, you may be able to offset your losses against your salary, which could reduce your tax. However you need to talk to your accountant to get correct information and sound financial advice
Negatively geared investments are long-term, as the value of your investment property may eventually surpass the costs.
What is Positive Gearing?
If the income your investment property generates is greater than the monthly costs, your property could be positively geared. This generally occurs when interest rates are low, and rental rates are high. Positive Gearing is the preferred objective in the longer term – as you’re in this to make money, not lose it!
Planning Your Investment
A common mistake property investors make is purchasing the investment property in the name of the highest income earner to reduce tax. This works for a negatively geared property. However, when the investment becomes positively geared, the opposite occurs and tax obligations can increase.
Changing your investment structure can be costly, and may not be worth it. So, consider when your investment will become positively geared, and create a plan that will maximize your returns when this occurs.
If you are looking to purchase an investment property, and you’d like to have a chat about your loan options, why not give us a call on 02 9068 6644 or shoot us a quick email.