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Positive vs. negative gearing
in properties
Like all investments it pays to do your homework before you take the plunge into property investment.
But even with rising interest rates, a sound strategy can pay off. The shortage of rental properties, combined with rising prices in most markets, means that if you choose the right property and make sure you keep a close eye on your investment, you could reap the rewards.
Keep in mind that the interest and related expenses you incur (such as repairs and maintenance) are tax deductible.
Negative gearing means your loan repayments, fees and other costs exceed your rental income. This means that the net loss can be offset against other income you earn, so you will be able to reduce the amount of tax payable on your other income.
Positive gearing, on the other hand, is where the annual rental income received from the property is higher than the annual loan repayments and costs. The benefit here is that you earn extra income, but of course this is taxable. Also make sure you factor in the capital gains tax you will have to pay if you decide to sell the property. Be sure to consult your taxation adviser.
Take control of your investment by being properly informed on property values, trends and what is happening in the home loan market.
To research the areas you are interested in, read property-related articles, use reputable property research companies and search the Internet, plus talk to people in the know. Find out each area’s average rental yields, what services infrastructure is in place and planned, and the property price growth that has been experienced and is expected.
Invest the time to fully understand the market – it could make a big difference to future investment returns.
If you are renting out a property, particularly a residential rental property, then you have to increase rent. This may be annually, but most likely every 18 months to two years. Why? Well, there are a number of reasons this is considered to be a standard operating procedure in property investment.
Firstly, small rent increases regularly are more likely to be absorbed by your tenants than a large increase when it is possibly too late.
Secondly, you need to be keeping up with inflation and with the rental market.
Your personal property investment rules probably involve getting the most out of your investment to support your overall investment plan. Why subsidize your tenants’ rent at the expense of your investment goals.
