Let’s Talk Strategy for Australian Property Investment
Let’s talk about Property Strategy.
As what we have mentioned in the last post. There are two ways for property investment. A positively geared properties or negatively geared properties. Here we are going to discuss both of them.
Positively Geared Properties are investment properties that generate income for you from the first day. Negatively geared properties, on the other hand, require investors to contribute to the property’s operating expenses, either from partial mortgage repayments, repairs and maintenance or council rates and fees.
It is definitely a challenge to secure positive cash flow properties, but it is possible.
One of the major benefits of securing a positively geared investment property is the flexibility for you to acquire further properties without needed additional cash to fund these investments.
Strategies for finding positively geared properties include:
- New properties where depreciation benefits are available in the early years
- Properties with high rental returns
- Sufficient rental returns to overall outgoing expenses (borrowing costs, rates, body corporate fees etc.)
- Invest with larger cash deposits to reduce loan fees
Negatively Geared Properties occurs when the cost of owning a rental property outweighs the income it generates each year. This creates a taxable loss, which can normally be offset against other income including your wage or salary, to provide tax savings.
Let’s say for example that John owns a rental property generating $35,000 in rent each year. The costs of holding the property, including mortgage interest, come to $40,000. This gives John a taxable loss of $5,000, which he can use to reduce the tax payable on his salary.
If you know in advance that your investment will record a loss over the financial year, you can apply to the Tax Office to reduce the amount of tax taken out of your salary. This is called PAYG Withholding Variation and it can provide a real boost to your personal cash flow. You can chat with your mortgage broker about options and with a tax advisor or accountant for more details, otherwise, our investment manager will be able to assist you in all of this issue.
Gearing often plays a significant role in all investors strategies. Knowing your investment strategy is important, and getting expert financial advice is smart if you need help identifying the right approach to maximise your profits.
Now let’s talk about the risk associated with negative gearing. While there are some certain benefits associated with negative gearing, it isn’t without its pitfalls. When you negatively gear your property, you still record a loss. And a loss is a loss. Before you commit to negatively gearing your investment property (or multiple investment properties) it is worth considering what the repercussions of doing so are.
- What happens if you have difficulty filling your rental property at any one time?
- What if there is a dramatic turn down in property values and your investment fails to increase in value?
- What if interest rates rise very quickly and you have just agreed with your tenants that you will not raise rents for at least 12 months?
These are not questions that should be answered quickly or treated lightly. Take the time to do your due diligence and know how you would cope if any of the above scenarios come true. If you are confident that you could easily handle any losses in income etc, then you are on the right track.
Of course, if you do choose to negatively gear your property, there are some easy ways for you to minimise the risks associated with doing so.
Strategies to minimise the risks of negative gearing:
- Choose your investment property wisely: Buying a property that is located near all the major amenities and appeals to a wide range of tenants should help you to ensure your investment property is never vacant for very long.
- Manage your income: When managing investment property, there are times when it will cost you a significant amount of money – when the property is vacant, when it needs repairs etc. So, before deciding on negative gearing make sure you have enough income to successfully manage all the expenses that come with owning a property – not just day to day expenses, but all expenses.
- Protect yourself and your investment: As a property investor, it is critical that you adequately protect and ensure not only your property but yourself in the event that unforeseen circumstances arise. It never hurts to be prepared for the worst case scenario. You can speak to your mortgage broker or financial planner to learn more about the types of insurances you should have as a property investor.
As with all investments, it is advisable to consult investment property specialists for advice to suit your personal circumstances, be it positively geared or negatively geared investment. Before making any decisions, it is important to consult with a professional. A mortgage broker can guide you through step by step of the whole process, identify the risks associated with negative gearing and help you formulate a plan to not only minimise the risks but tackle any hurdles that you may face during your investment journey. Otherwise, you can contact our investment manager, Linda Xu, for all of this matter.
Thank you, we will be back with another informative blog soon. Please leave a comment in the comment section below if you have questions. We will get back to you with answers on the other blog post.