There is always a lot of talk about positive and negative gearing in Australia because our property market is so ripe for investors. The average Aussie parents may want to buy an investment property which is positively geared in order to help them get onto the property ladder. Every time tax policies are revised, there is always discussion of whether landlords should be receiving negative gearing tax benefits, and many renters are quick to blame these for the rising cost of their rent.
But, what is the real difference between positive and negative gearing? And, is negative gearing always a bad thing?
Positive Gearing in Australia
Lloyd Edge's best-selling book, "Positively Geared," describes how he was able to build a multi-million dollar property portfolio and retire from his job using positive gearing concepts in Australia.
Positive gearing is when the income earned from the property is greater than the expenses you pay on the property. This means there will be some cash left over each month once expenses are paid to put in your pocket.
Positive gearing properties are a strategic investment choice which is favoured by many experts because it gives you the ability to grow a property portfolio without having to be a high-income earner. This is an investment method that can be used by the average salaried employee to grow a property portfolio, so they focus on improving their income position and serviceability to the banks, meaning that in the banks' eyes, they are able to service a new loan and buy another property.
Many banks will use a calculator to determine whether you are able to service a new loan.
At the end of the day, positive gearing provides a "sleep at night" factor, so that if there were rising costs of living, you had an unexpected bill to pay, or you lost your job, you will not need to worry about your investment property because it is positively geared and will be able to pay for itself. This is a very different concept to using negative gearing as an investment strategy. So, what is negative gearing?
Negative gearing in Australia
Many taxation experts for years have been spruiking the benefits of negative gearing in Australia for lowering your tax bill, but this type of investment strategy (to negatively gear investment properties) really only favours the wealthy who are trying to avoid hefty tax bills. For the regular investor, this may be a strategy that will prevent you from getting further than a first or second investment property.
Negative gearing means that the income you earn from your investment property is less than the expenses that you incur on the property. This means that at the end of each month when you settle all your bills, you are using money from your wages to pay for this property, leaving you with less disposable income.
But negative gearing is not always intentional. In the current climate of rising interest rates, mortgage costs are also rising, and this means that without increasing the rent on these properties, some positively geared properties may become negatively geared, which is discussed in detail in this Sydney Morning Herald Article.
Why is negative gearing bad?
If you really want to build a property portfolio with many investment properties, then negative gearing will be a way to halter your portfolio growth.
The banks will look at your serviceability. This is your ability to pay back a loan, and with negatively geared properties in your portfolio, this will lower the amount the banks will be willing to loan you. This is because each month you have to pay money out of your wages to cover the cost of your property, meaning you have less disposable income available to pay back the bank on a new loan. This is referred to as your debt service ratio.
How does positive vs. negative gearing affect rent costs in Australia?
In Australia, landlords who hold negatively geared properties are able to receive a tax benefit by reducing their taxable income from the losses made on their negatively geared properties. Renters often blame the government's tax incentives for the rising cost of rent as they contribute to the housing supply issue by forcing investors to purchase multiple properties in order to receive these benefits. However, if negative gearing tax incentives were to be abolished, we would actually see an increase in rent as landlords would want to turn their negatively-geared properties into money-making positively geared properties, as there would no longer be an incentive for a landlord to be making a loss on a property.
Why would you use negative gearing?
Negative gearing is a useful investment strategy for high-income earners who want to reduce their tax bills. This is because negative gearing means you will be losing money on the property each month and this will lower your overall taxable income position, resulting in you paying less tax.
One important thing to note is that negatively geared properties are typically in areas where the mortgage repayments are high but the rent is lower than the repayment. Therefore, negatively geared properties are usually found in areas like the middle of the city, or in locations like beach fronts and demographically favoured areas. For this reason, properties that are negatively geared are usually purchased in areas that have excellent long-term growth prospects. In this way, the sacrifice of negative gearing in the short term will reap the benefits of capital growth over the long term when it comes to selling the property.
In summary, negative gearing is not always a bad thing if you are using the right investment strategy. However, if you are looking at growing your property portfolio and holding multiple properties so that you are able to leave your day job, then positively gearing your properties may be the smarter investment choice. It is important to always ask a professional to help you come up with a plan for investing.
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If you are looking for a buyer’s agent to assist you with purchasing a home or investment property in the Sydney, Brisbane and Newcastle regions, as well as SA, TAS, ACT, VIC, NSW & QLD please get in touch with Lloyd Edge and his team at Aus Property Professionals here or give us a call on 1800 146 837!
