What is negative gearing?
Gearing involves borrowing money to invest in resources that generate both income & good growth potential. Negative gearing is when you borrow to invest and the income you earn from your investments is less than the interest you pay on the loan, thus giving you a cash flow shortage. If your investment is negatively geared, you need to have income from other sources to pay your loan promises & asset costs.
Risks associated with negative gearing
When you negatively gear your asset you still record a loss though you are accepting the loss in the short term with the expectancy that your income will surpass your cost and more significantly that your investment will upsurge in value so you can sell it for a capital gain in future.
Reducing the risks of negative gearing
If you decide to invest in negatively geared property then, there are some ideas you can try to reduce the risks.
- Choose a property that will appeal to a variety of tenants. Properties in a good area that are close to amenities are always attractive and are generally vacant for less time.
- Build a buffer into your budget to account for repairs and periods when the property is vacant.
- Take out adequate insurance for the property, so you are covered for those worst-case scenarios.
Looking at current circumstances the Government must work towards developing a strategy to improve the supply of affordable rental housing, partnering with the state and territory Governments. This will also assist in easing the pressure on low-income renters.
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