what is -tive gearing? how does it work?

For a 17 year old with lots of questions … I feel obliged… (I will try and keep it simple.)

Chtulu,

Welcome to the forum.

quote:

---

and I have been hearing a lot of good things about Negitive gearing, and I want to learn more.

---

Negative gearing strictly speaking is not a good idea because it costs you money. (That is why it is negative.)

When talking about “negatively geared” properties, this means that the property COSTS you money every year you keep. Practically this means that the rent you receive from the property is not enough to cover all your expenses. (i.e. loan repayments, insurance costs, maintenance etc…)

Why would people keep a property that costs them money? Well there are two reasons:

1) They can claim the loss as a tax deduction.
2) They expect the property to substancially increase in value over time, so that overall, when they sell the property, the capital gain will be greater than the sum of all their costs.

quote:

---

How does it work?

---

1) Find an expensive rental property for 300K (say)
2) Get the bank to mortgage the property and lend you 80% of the price ( i.e. 80% * 300K = 240K)
3) You then have to pay interest on your loan. Because you have borrowed money for investment purposes you are allowed to claim this cost against your assesable income.. Let’s say you have to pay 20K in interest per year.
4) Rent the place out for 15K per annum.
5) You will also have other costs associated with the property (insurance, water rates, council rates…) say 4K p.a.

So this property will earn 15K p.a. but cost you 24K p.a. Therefore it is negatively geared by 9K.
(These figures are a little bit “wrong”. Generally if you are going to negatively gear it will cost you between 2 – 6K a year.)

It will cost you 9K to keep this property every year. (well this is not exactly true since the rent will go up over time and these calculations also depend on the type of loan you take. Why don’t you go and talk to a banker, and ask them a few questions?)

quote:

---

what does it involve?

---

It involves loosing money every year!

Now I am not saying that -ve gearing is always bad. It isn’t! (for some very specific situations) But I will keep things simple for now. (spend time reading the forum. You can even do a search for my name (pinit2000) as I discuss this at length elsewhere.)

What it means is that you are happy to loose $1 to get $0.48 back from the taxman (that is if you are in the top tax bracket.) or $0.30 if you are in the 30% tax bracket.

quote:

---

what about tax? Is there away to minimise the amount of tax while maximising your profit?

---

Yes plenty of ways… Do a search for
1) Depreciation (again read my other posts)
2) Non cash deductions.
3) Trusts
4) Discretionary Hybrid Trusts

It will be well worth the effort!

quote:

---

I have read somewhere that you can ‘cheat’ the tax system by remaining constantly in debt (or what ever) and end up paying no tax because of your debt, you don’t own anything, but you control everything. True?

---

If you are going to learn anything, learn this … good people never ‘cheat’ the tax system. If you ‘cheat’ you will get caught. However you can legitimately “minimise” your taxable income.

quote:

---

you don’t own anything, but you control everything

---

OK, you want to learn about TRUSTS []

quote:

---

Or am I missing a lot?

---

Yes, but you are on the right track. I hope this has helped… make sure you use the “search” function on the forum. It will take time to understand everything fully… so just take it easy and if you have more questions, just ask!

Finally. You may wonder whether there is a way of minimising your tax and having a property that doesn’t cost you anything and increase in value over time. The answer is YES! (just read my other posts.)

Pin

P.S: You better concentrate (focus) on your exams before spending too much time looking for property information. If you want you can copy this information into a word document and keep it for later.

Good Action,

just using common sense, are you in to make money or lose money? if you are not making money from day 1 think again.

Good book for you my friend “Rich dad poor dad” Robert kiyozaki and of course “from 0 to 130 properties in 3.5 years” by th excellent Steve Mcknight

Good education about the basics

Hey Pinit2000, thanks for helping and explain what -ve gearing is, i wish i knew you about 7 months ago, im also just a youngie on here, im 20 years old and i own quite a few investment properties, but when i was tryin to seek advise like Chtulu, no body would offer it or help me out, banks refused me cause of my young age and all and i remember one time the bank sayin to me “come back when your a little older”

well, to cut my story short, i had to read up about books ask my mother who is an accountant and she explained to me but very little but with persistence i was able to teach my self about property investing and was eventually able to find a bank that helped me and know i play the property game, but to get were i am today has taken alot of persistence and knock backs.