What is the benefit of owning a negatively geared investment property?

Thankfully the Federal Government ruled out any changes to negative gearing despite the urgings of the New South Wales Liberal Government in November.

It’s always a bit rich for state governments to seek the trimming of tax breaks, especially as they refuse to consider dropping stamp duty on property purchases. But we digress.

But how does negative gearing work? A property is negatively geared, when the costs of owning it – municipal and water rates, strata levies, land tax, insurances, repairs, depreciation, maintenance and so on, exceed the rental income. In other words, your investment must make a loss before you can claim the benefits of negative gearing.

Apart from ‘revenue deductions’ such as those mentioned above, property investors may also claim capital items such as a hot water service while any white goods can also be ‘depreciated’. In other words, landlords can claim the costs of capital items over several years rather than as a once off deduction. Depreciation schedules are established by the ATO and range from a few years to 20 years or longer.

Ultimately negative gearing enables you to increase your stake in an asset (over and above what you could afford with your own savings) and this has the potential to produce solid returns. But on the flip side it can also magnify losses. It’s for this reason that you must do your homework before borrowing money to buy an investment property.

Typically, this involves finding a quality, well-located property, with the help of a Raine & Horne agent, which has the potential to produce positive long-term returns. In other words, make the right investment decision first and then consider the tax benefits.

What measures should I include in my property invstment resolutions for 2017?

However, with official interest rates tipped to head north in 2017, its best not to rest on your laurels, and there are several steps you can take to maximise your real estate returns next year. 

1. Monitor your portfolio. Taking a ‘set and forget’ approach to investing is very last century. If you’re a long-term investor, you might be surprised what your investments are worth, especially given the strong run by many Australian markets over the last five years. A clear understanding and evaluation of your portfolio, with the guidance of your Raine & Horne property manager, can help you decide whether you’re ready to make your next investment move or not.
2. Don’t sit on the fence. At the end of the day, who really knows what the Reserve Bank will do with interest rates in 2017. And so, if you have made up your mind to invest, have completed your research and found the right property, then make a move. Not a single person ever meets their financial goals by sitting on the fence.
3. Get your finances in order. Once you’ve decided to act, be sure to get your finances in place with a preapproved home loan. To obtain a pre-approval, investors are asked to submit existing loan documentation such as employment history, wages and salary information, assets and liabilities, for example, credit card debts. A lender will usually do some credit checking. A pre-approval gives you confidence about how much a lender is willing to lend, which is useful information to have when making an offer on a property. If you want to find out more about getting a loan pre-approved, contact Raine & Horne’s financial services division, Our Broker on 1800 913 677.
4. Budgeting. To be fair, budgeting falls under the banner of getting your finances ship-shape. Given the extended period of low interest rates and strong returns, it’s easy to sit back and think the good days will continue forever. However, markets turn and it’s always good to have some extra cash stashed away. This might involve creating a budget to track your personal revenues and expenses. Track your cashflow for a month, and then you’ll be well-placed to know of you need to make a few spending tweaks, or not.
5. Check your interest rates. New year’s resolutions present you with a good opportunity to finetune the investment loans. If you’re lenders aren’t given you the best interest rates, seek answers. If they refuse to budge, contact Our Broker, and we can help you move elsewhere.