Negative Gearing
Back in the 80’s and 90’s negative gearing was the buzz word. People like Jan Somers made themselves famous through the promotion of negative gearing and real estate agencies rolled out sales on this specific basis.
In a nutshell, negative gearing means the cost of your loan interest costs, and property holding costs, are greater than your income, and as such that loss can be offset against your salary to reduce your personal tax.
I’m not a fan of negative gearing for a few reasons –
1. Job security is critical to being able to actually fund the losses on the property and the world has changed very much since the GFC and COVID, and job security are almost two opposite words
2. It’s still cash flow. Yes, you get a tax refund at the end of the year, but you still need to fund a cash flow loss every month.
3. It all depends on Capital Gain. The upside with negative gearing is when you get good capital gain you can sell for a profit or refinance and take some equity out, or fund the purchase of another property (negatively geared). Again, since the GFC lending criteria has changed dramatically and loan to value ratios are not what they used to be.
4. Politics – Negative gearing has been tossed around many times and Labour has proposed it should be scrapped. I think it’s only a small chance it could be scrapped because it’s a political hot potato, but it can be legislated away at any time.
In summary, I’m not saying negative gearing is bad but it has a lot of risks and you need to be incredibly careful and confident about your security of income to head down this investment path.
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