Investors should really look at minimising the risk of negative gearing by choosing an investment property that is likely to increase in value throughout the investment period
Negative gearing is an important consideration for investors strategies and must be highly regarded weighing up the pros and cons. It is vital to know ones investment strategy and get expert financial advice to make sure negative gearing is understood fully before getting into it. There are of course multiple benefits to negative gearing in all markets especially if the investment is for the long term, but it also has its drawbacks.
When a property is negatively geared, that property still records a loss and it has implications on your taxable income and your total outlay. You are still ultimately out of pocket and having a buffer to manage the potential cost of holding the property is critical.
These are a few scenarios to consider:
- A plan to hold the investment property if it experiences a longer period of vacancy or a drop in rent over the short term
- A long term plan to hold the property if the capital gains take a few longer years to increase or even worse, decrease in the short term
- A financial buffer or plan if the interest rates rise quicker than normal and the rent stays the same for a while
- A drawdown facility if extra funds are needed for emergency maintenance or significant general maintenance.
Of course it would be great to be neutrally or even positively geared and still make a net profit but these sorts of properties are very hard to find. At the end of the day, a savvy investor would do their sums and know their number before getting themselves into a negatively geared situation.
Top 5 tips on how to minimise the risks of negative gearing
1) Ever heard of the phrase, measure twice, cut once. The same goes for property due diligence. Spend time on it. If you don’t have time or don’t know what you are looking for, it would be very wise to get expert help to make smarter investment. Getting past records can be very helpful in knowing what the future holds.
2) Weigh up your financial position and choose your investment property wisely. It is sometimes better to stretch your borrowing capacity to buy in a better area than buying something that is well within the budget. Remember it is important to buy properties for equity and capital growth. Buying properties that have slow capital growth is less likely when the property is located near major transport, amenities, current and potential infrastructure and these usually cost a bit more.
3) Have a buffer and a backup plan for rainy days. There are sometime unforeseen circumstances that would mean that there is significant cost to outlay for maintenance. Sometimes the market can slow down and the rent may not be able to cover the rising cost of the interest rates, so a financial buffer is always helpful. A great way to do this is to have a draw down facility in the loan for rainy days.
4) Protect yourself and your investment. Life happens and sometimes, they are unavoidable. That is why, it is important to consider getting landlord insurances and other insurances like income protection for times when the unexpected happens. It is also vital to know how and where to access other funds should that be needed.
5) Get an A team to help you maximise your return on investment. Having a great accountant that knows the full situation is critical. An accountant with a portfolio of properties is ideal so he or she knows the game and is able to walk the talk.
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