Negative gearing can lead to positive debt problems

Property investment has always been a very popular wealth accumulation strategy in Australia. Its popularity was significantly boosted with the introduction of negative gearing in 1985. Negative gearing offers property investors a measure of protection and tax benefits, as any losses experienced in any given financial year with respect to an investment property held can be written off from the investors taxable income (providing the property was used to generate an income).

Consequently for many years investment gurus would promote negative gearing as the best thing since sliced bread and as the reason why investment properties can cost you only $50 per week after all the tax deductions are taken into account.

You may well wonder why aanyone would invest in a property which is loosing money every week. The reason is simple – potential capital appreciation.

Capital Appreciation

Historically speaking Australian house prices have doubled every 7-10 years. This is not a guarantee, nor is this the results that have been experienced in every city and suburb. Some areas have performed markedly better and others much worse. This is only a guide of past price movements.

The problem with investing into negatively geared properties for capital appreciation is that once you hold several investments there is little monmey left over to cover your cost of living.

Multiple negatively geared properties

While you can make money holding a single investment property for 10, 20 or 30 years, holding 3 – 4 such investments can actually help you become financially independent and retire early – providing you do not lose it all in the process.

Remember that while property prices always increase in the long term, in the short to medium term they can go up or down or simply stay put for 3 – 5 year. This can be difficult to sustain for an investor who is looking to dip into their property equity in order to be able to sustain several negatively geared investments at the same time. If interest rates move up and prices stay put or even drop, investors who rely on negative gearing can be pushed into offloading their negatively geared investments sometimes at a loss instead of the much anticipated profit.

Many of the debt laden investors we speak to have found themselves in financil difficulties because of overcommitment to negative gearing. However there is another way.

Positively geared investments

Interest rates in Australia are at historic lows and becuse of this investors who plan ahead may be able to lock themselves into very cheap mortgages for the next few years where the cost of holding their property is actually less than the revenue that htier investments will generate. This is what is known as positive gearing. Today, unlike in the past, it is possible to purchase positively geared properties in many metropolitan suburbs of Australia. Properties that will actually add to your taxable income instead of take away from it, as well as appreciate over time. If you are having a difficult time sustaining some of your current investment properties, you should revisit your investment strategy and consider replacing your cash drains with cash cows.


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