Property investment generally involves large numbers. For many of us it means borrowing or “leveraging” a lenders money, at a cost called interest.
Gearing is simply the relationship between the loan (including interest) repayment and the income generated by the investment. Positive gearing is where the income (in the case of property the rent) is more than the loan payment. Passive gearing having the income and the loan repayment in equilibrium. Negative gearing suggests the income doesn’t cover the repayment and as such some other form of contribution is required to support the loan.
If only it was that simple!
Whilst gearing is one factor in the relationship between property and investor, there are many other items and costs to consider when investing. A positively geared property could quite easily end up a negative cash flow when costs like strata levies, rates, repairs etc are factored in. Similarly a negatively geared property now might be positive within a short space of time as rents increase over time.
As investors we need to consider all aspects of the transaction and their effects on our cash flow and it’s not just the short term tax advantages that should cloud our judgment. When looking at your expectations within an investment strategy short term goals are critical but also are the longer term ambitions. There is no point investing in a property with a negative cash flow (even after tax effects – and we will discuss that in a later blog), if the final destination outstrips the short term costs.
To put it another way we need to ensure the light at the end of the tunnel is not a freight train!
It may be that your goals will be satisfied by a moderately geared investment with a positive cash flow ie you need not contribute from day to day funds, which allow you to sit back and access the capital gains or the equity created at a suitable future date. Yes there will be some tax issues but overall you are achieving your goals with a minimum of fuss.
It may also be true that you have disposable income which you are willing to contribute to short term pain for longer term growth using the tax advantages in the meantime.
Both are acceptable strategies, but not for all and that is the big question – what is suitable for you in pursuit of your goals. Here alone I have highlighted just one of the many pitfalls which stop potential property investors.
At Property Portfolio Solutions Shaun Davison and I have built a team of experts who will sit and understand your “WHY” and tailor a solution. From there we will make it happen,
Our catchcry is “Your legacy is Our inspiration” and our approach based on what inspires you, will make your legacy seem so much easier to achieve. We are easily contacted by going to our website www.propertyportfoliosolutions.com.au where the start or even the continuation of your property portfolio is made simple.
