Negative gearing is when the expenses related to your investment property (such as mortgage payments, management fees and property insurance) exceed the amount of money you earn in rental income.
And despite the name, having a negatively geared property isn’t as negative as you may think. In fact, purchasing a negatively geared property can have a number of benefits for Perth property investors, and is now seen by many seasoned investors as the most effective way to generate long-term profit from an investment property. So, what’s so positive about negative gearing?
Negative gearing benefits
- Tax savings: One of the key advantages of owning a negatively geared property is the short-term tax benefits it provides. Whilst property investors are making a loss in theory, they are also able to claim any loss they make on their property (or properties) against their taxable income for that year. This will reduce the amount of tax they need to pay come end of financial year, and could even put them in the lower tax bracket, meaning they would be taxed at a lower rate.
- Long-term profit: The whole idea behind negative gearing is to purchase a property that is likely to increase in value over time. Whilst investors may need to cover their expenses in the short-term, purchasing a property with high capital growth potential could see them making a significant profit in the long-term. Providing investors have purchased a property in the right location and at the right time, the profit made upon sale can far exceed the money lost in short-term expenses. Investors following this strategy will generally purchase a property in an up and coming suburb or areas with planned density increases, where house prices are likely to increase in value over time.
- Opportunity for expansion: Providing investors have chosen a chosen a property with high capital growth potential, a negatively geared property could give them the leverage they need to purchase another property. As their property increases in value, they may be able to borrow against that increase in value to buy another addition to their property portfolio.
A note about the risks of negative gearing
Whilst negative gearing can be an incredibly effective investment strategy for investors looking to generate long-term profit from their Perth investment property, it doesn’t come without its risks. Whilst there are many positive to negative gearing, it’s important to remember you will still be making a loss in the short-term. If you do plan on following this investment strategy, you need to ensure you have enough money in the bank to cover the costs of your property in the short-term, and this includes planning for unexpected costs. If you’re looking to make immediate profit from your Perth rental or generate an ongoing passive income without too many expenses, this investment strategy probably isn’t for you.
Professional property management from Rentwest Solutions
Regardless of whether you’re purchasing a property for capital growth or rental yields, the way in which you manage your investment property can make a huge difference to the amount of profit you make from your investment. At Rentwest Solutions, our expert property management team have the insight, knowledge and advice you need to make the most out of your investment properties. Whether it’s improving your rental returns or helping you market your property to prospective tenants, our Perth property management team can offer the support and solutions you need to achieve your desired results.
To find out more about our property management solutions, email us at [email protected] or call us on 9314 9888.