Aussies love property and many investment properties are negatively geared, where the expenses to run the investment property exceed the income. Typ[ically the loan on the property is the biggest cost.
Below are some points that bear considering prior to buying a negatively geared investment.
Most commonly, this applies to property, but this also applies to share investing, which you can also negatively gear.
An investor should only make a negatively geared investment if they meet several of the below conditions.
1) You have income stability
The investor has secure and permanent income from other sources sufficient to cover living expenses as well as the shortfall under the negative gearing.
2) You have savings for repairs and rental vacancies
Where the gearing arrangement or borrowing includes a liability to make margin calls in certain circumstances, the investor can satisfy the margin calls by supplying further security or by payment from other sources to avoid the possibility of a forced sale [keep in mind that the economic conditions that lead to the need for a margin call will, almost certainly, mean that any forced sale will be at depressed prices and will lead to a significant loss to the investor].
3) You have a long term view
The investment is made on the understanding that it will be retained for at least 5, preferably 10 years or longer.
4) You have good life insurance
The investment and borrowing have sufficient flexibility to cover events such as death, disablement, major illness or redundancy, the first three of these would normally be covered by insurance or super benefits and redundancy could be covered by an employer pay-out.
However, even in these circumstances the negative gearing arrangement may need to be terminated. Check whether this can be done without incurring penalties and with the flexibility to avoid suffering loss through a forced sale of the asset.
5) You are a higher income earner
The taxpayer can take full advantage of the tax deduction. Negative gearing normally works best for investors on the highest marginal tax rate but may be of less value to low tax-rate or non-tax-paying investors.
- Those taxpayers on $80,001 – $180,000 who pay $17,547 plus 37c for each $1 over $80,000
- Those taxpayers on $180,001 and over who pay $54,547 plus 45c for each $1 over $180,000