What is negative gearing and why should you care?
Over the 2014-15 financial year property, Australian property investors claimed $11.1 billion in net rental losses and only $7.5 billion in net rental profit, CoreLogic RP Data shows. That means collectively they made a whopping $3.6 billion in losses over that period (the lowest that loss has been since since 2003/04).
Do those losses mean property is a terrible investment? Quite the opposite actually. They're the statistical footprints of a controversial but effective property investment strategy – negative gearing.
What exactly is negative gearing?
In a nutshell, negative gearing is when the cost of your investment home loan exceeds the total rental income you're making from the property. At face value it seems counterintuitive – but there's more going on below the surface.
When you make a loss on your investment property you can claim that amount as a deduction against your total income at tax time. This reduces your taxable income and leads to a smaller tax bill. All the while your property is increasing in value causing your equity (and wealth) to steadily rise until you eventually profit from the property's resale (or use it to leverage into more investment properties.)
Is negative gearing the right option for your Melbourne property investment?
As with any Melbourne property investment it's essential you're well aware of the risks
Negative gearing isn't the ideal strategy for everyone, and as with any Melbourne property investment it's essential you're well aware of the risks before diving into a home loan. Firstly, you must consider the possibility that interest rates could rise, which could increase the loss you make and stretch the limits of your finances.
There's also the chance that your property will decrease in value. If it does, your losses won't be offset by capital gains and you could end up losing a large amount of money in the long run.
When investing in property, there's so much at stake but even more to gain. For that reason you need advice from a local expert that you can trust – one of our experienced Melbourne mortgage brokers here at Direct Mortgages.
We've helped countless aspiring investors devise their own strategy for investment success, tailoring home loans and solutions to their unique situations. Let us help you – give us a call soon for friendly no obligation chat.
