What is ‘Negative Gearing’?

by
Jack Needham

(article shared from http://www.smartpropertyinvestment.com.au/markets-a-research/14935-what-is-negative-gearing)

Negative gearing – the media, politicians and investors love talking about it, but what does it actually mean and why is it an important consideration when devising your property investment strategy?

It seems that negative gearing policy is always hitting the headlines. Negative gearing can be an essential part of a property investor’s strategy – but it is important to understand the policy, how it should be used and how it can affect your buying behaviour.

What is negative gearing?
‘Gearing’ simply refers to borrowing to invest in an asset, be it property or otherwise. In terms of property, it refers to taking out a loan to purchase a property.

When an investment is negatively geared, it means that the interest paid on this loan is exceeding the rental income provided by the property – resulting in a loss.
This is opposed to when a property is neutrally geared, or positively geared. Neutral gearing refers to the scenario when the interest on the loan is equal to the income generated by the rental property in question.

When an investment is positively geared, it means that the income generated by the property exceeds the loan repayments on the property – resulting in a profit.

To give an idea of when a property would be considered to be negatively geared, let’s consider the example below.

Imagine you bought a $540,000 property and took out a $500,000 loan at an interest rate of seven per cent. The annual interest payable on the loan is $35,000.

Let’s also imagine that you are earning $530 per week in rent, which adds up to an annual rental income of $27,560.

Based on the above example, you are paying $35,000 in interest but only earning $27,560 in rent – resulting in a shortfall of $7,440 per year. In this case, the property is negatively geared.

Negative gearing policy explained
Many investors get into property investment to benefit from longer-term capital growth, but having an investment property in some of Australia’s more competitive real estate markets can often mean sacrificing a strong rental yield, and therefore making a short-term loss on an investment property.

The idea here is that as property prices increase rapidly (ie capital growth), rental prices fail to keep pace with this growth. In this case, investors are banking on making their money through the change in their properties’ values, rather than solely relying on the income generated from the rental payments they receive.

In Australia, negative gearing attracts a tax concession or benefit on both property and shares investments. When a property investor is ‘losing’ money on their investment due to the loan repayments, they can write-off the loss each year as a tax deduction – effectively reducing their taxable income and making up for some of the loss experienced.

In the case outlined above, the $7,440 shortfall would be removed from the investor’s taxable income. If, for example, their taxable income was $90,000, negative gearing would enable them to reduce this to $82,560.

Negative gearing can be used with other tax policies such as depreciation claims and related expense write-offs (such as property management fees) to bridge the gap between profit and loss each financial year. Depending on how significant the negative gearing scenario is, this may be enough to render the rental income deficiency inconsequential.
For information on how negative gearing should be calculated into your tax return, refer to the ATO website.

Why would an investor choose to be negatively geared?
In an ideal world, investment properties would provide solid long-term capital growth as well as a profit from rental income. Unfortunately, securing such investment properties can be a difficult process.

It could be that, in order to secure a property that promises impressive long-term capital growth, investors need to sacrifice short-term rental income and engage a negative gearing strategy.

This is particularly the case in capital city markets – where long-term growth drivers such as population increases, infrastructure projects and employment opportunities exist, but the sheer volume of rental stock and competition between investors means that buy-in prices are high and the ability to charge a rental rate that would provide an immediate profit is limited.

It may be that an investor decides that achieving this long-term increase is worth the short-term sacrifice, and so a negatively geared investment will work within their investment plan.

It is important to note that negative gearing is generally not designed to be a long-term investment practice. The idea is that investors will use the tax concession to limit the pain whilst they progress on the loan repayments outstanding on their property – until they reach a point where the property becomes neutrally or positively geared.

What are the disadvantages of negative gearing?
The disadvantages of negative gearing revolve largely around the income of an investor – indeed, your income will likely determine whether you can afford to buy a negatively geared property (and your tax bracket may influence how much of a benefit any deductions yield).

If you are on a low to mid-range income and are seeking to expand your property portfolio within a short period of time, holding a negatively geared property has the potential to limit your ability to save for your next deposit.

Remember that holding an investment property involves far more than simply meeting the loan repayments – and maintaining a cash reserve to dedicate towards property upkeep, or periods where the property is unoccupied, becomes a more difficult task when a property is negatively geared.

Holding several negatively geared properties has the potential to create financial stress associated with meeting repayments, and it places increased importance on the investor staying in their current employment or gaining a higher-paying job.

There is a degree of risk involved with negative gearing, and an increased onus on the investor selecting an area that will experience significant capital growth. The future returns on the property need to exceed the cumulative difference between loan repayments and rental income throughout the time of ownership.

If property values don’t move up, and rents don’t go up either, the investor will have sacrificed years of cash flow for little in return. For the sacrifice of holding a negatively geared property to pay off, the property needs to provide good long-term returns.

Is negative gearing here to stay?
The other big risk with choosing to invest in a negatively geared property for a long period of time is the amount of political uncertainty surrounding the policy. Australia is one of the only countries in the world to feature negative gearing as a taxation policy, and a degree of doubt exists over its longevity.
There are many arguments concerning whether the policy of allowing deductions on negatively geared property investments is good or bad for the real estate market at large.

Many proponents of the policy argue that it encourages investment in housing stock, increasing rental availability and driving construction employment.

Arguments have also been made that negative gearing adds an artificial level of increased competition to the real estate market – driving up prices for owner-occupier buyers, forcing them to remain renters and thus playing into the hands of ‘already rich’ investors.

The policy has previously been abolished by the federal government – in the 1980s – before being reinstated a short time after and it continues to feature prominently in debate surrounding taxation.

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Your EDUCATION may be ‘FAILING’ you because…

Life Doesn't happen in exam rooms (2)

[Flashback] High school/ University Exam Period, late night study sessions preparing for your future, where you have that Tim Tams opened, messy hair and severe eyes bags.

[Now picture this] Full Time work. Bills, Groceries and Rent and those special window-faced envelopes that haven’t been touched for precarious reasons. You look at the date and you realized that Christmas is round the corner, not only do you need to think about presents for your loved ones but for those long lost relatives that we have to see at Christmas parties as well as wear those festive Christmas jumpers.

 

Check Bank Account to pre purchase flights for your best friend’s wedding. A thought popped into your head, ‘Did I even get paid? Where did all that money go?’

 

Richard Branson writes

Are young people being educated not to think?

 

RB future of education

In my editorial from the first Student magazine, I highlighted the need for real debate about outdated education models. “The fierce debates on education, surely involving the student more than anyone, are almost never thrown open to him. We plan to be a vehicle for intelligent comment and protest.”

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Student magazine fulfilled this aim, with lots of articles and discussion around education issues throughout its lifespan. We ran a humorous account of Alias Lamego’s experiences of education called ‘College Loaf’. More seriously, we ran an article called ‘Education Axed’ by Gavin Maxwell, the acclaimed author of Ring of Bright Water, who was a big influence on my own development.

“Man is a rational animal, whose opinions and ideas can be arrived at by rational processes of thought…” it began. “I contend that this claim could not be upheld, and that all civilised races of making are so thoroughly indoctrinated by their education as to render their intellects functionless. Each individual has to a greater or lesser degree, been brain-washed, although we prefer to use the word ‘educated’, and so have all nations at all times.”

 

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Gavin went on to question how teachers are often tasked with showing pupils how to learn facts, rather than truly use their brains and come up with new ideas. “The strictly scholastic side of a child’s education…consist in the main, of the ingesting of a vast mass of largely useless and uninteresting facts for dyspeptic regurgitation in subsequent exams.”

 

RB future of education4

 

 

He also ponders, back in 1967, how technology could already be holding back real education. “So, here is our educated man, living in an essentially technological world which actually contributes to the submissive, non-thinking condition upon which his whole education has been based. The higher the technology, the further the regression into the nursery world of toys and dreams of power.”

RB future of education5

 

While I think that technology has a huge role to play in improving education and engaging young people in learning, Gavin’s points about the education system’s obsession with stats and exams ring true. There should be far more focus on practical education and the development of skills to use used in everyday activities and business. Life doesn’t happen in exam rooms.

 

 

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Gavin Maxwell concludes: “The older generation is guilty – then and now – of educating its children not to think.”

 

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Advice on selling to close friends and family, Jack Ma (Richest man in China) shares his thoughts

Jack-Ma

Jack Ma, founder and executive chairman of Alibaba Group (one of the world’s biggest internet-based business) is China’s richest man and according to Forbes 18th richest person in the world with a net worth estimated at $24.1 billion (Wikipedia). Prior to his success, he failed his university entrance exam 3 times and only first encountered a computer 1997, aged 33. Jack Ma shares his thoughts as he once said:

‘When Selling to close friends and family, no matter how much you’re selling to them, they will always feel you’re earning their money, no matter how cheap you sell to them, they still wouldn’t appreciate it.’
There will always be people who do not care about your Costs, Time, Effort, they rather let other people cheat them, allowing others to earn, then supporting someone they know. Cause in their heart, they will always be thinking, ‘How much did he earn from me?’ instead of “How much did he SAVE/MAKE for me?”

This is a classic example of a poor person’s mentality!

How did the rich people become rich? One of the main reason is because they are willing to SUPPORT their associates business, taking care of one another’s interests thus naturally they get back more.

Your Friends will in turn support you, thus the circle of wealth continues to grow and grow!

Simple Logic, you will start to get rich once you understand it.

Jack Ma on Sales: ‘When doing Sales, the first people who will trust you will be Strangers, Friends will be shielding against you, fair-weather friends will distance from you. Family will look down upon you.’

The day you finally succeed, paying the bill for every get-together dinner, entertainment, you will realised: Everyone else is present except the Strangers.

Do you get the meaning of this?

We need to treat our dear Strangers better! And even more so to Friends who know what you are doing and yet still SUPPORT you!

Let us treat STRANGERS who buys from us better from today. They are your BEST customers!

Source: Charles J. Phua, a translator and insight writer. Linkedinhttps://sg.linkedin.com/in/cjphua

I was earning $500,000 a year at 30: Here are the 10 best pieces of advice I can give you about money

 by Cary Carbonaro, Business Insider Contributor Nov. 17, 2015

businesspeople london bankersFlickr / Herry Lawford

After graduating from college, my career moved quickly up the corporate ladder, including eight years on Wall Street.

I worked at JPMorgan Chase, I was a vice president at Citibank, and then a director at Lord Abbett Investments on the e-marketing and e-commerce side.

Every day a new company was going public, and I lived across the street from the New York Stock Exchange.

Every night before a business day, I would hear them setting up some crazy paraphernalia in the Street. There were giveaways on the Street because there was so much “silly” money. Anything with a dot-com got funded or went public.

For example, Pets.com was launched in 1998. In case you don’t know the story, the Pets.compeople spent half of the value of their company on a Super Bowl ad and by 2000 the company was defunct.

I was earning $500,000 a year at age 30, but I felt like I wasn’t making much money because I was in an established industry without big stock options. It was conservative and I was conservative. It didn’t fulfill me. I felt like I wasn’t making a good difference in anyone’s life.

Cary Carbonaro headshot

Courtesy of Cary Carbonaro

So I quit that job, moved to Central Florida and started my own financial advisory business. Everyone thought I was crazy. Who walks away from an amazing job like the one I had?

I had to reinvent myself as an entrepreneur. It took me a long time to build my firm, one client at a time, from scratch. I went from $500,000 income a year to almost zero the next. It challenged me personally, professionally and emotionally.

The beautiful side of the hard work is that I have a much better sense of my purpose in the world. I love being a practicing certified financial planner because it equips me to make a difference in my clients’ lives. I get to help them make all the right moves with money. It is rewarding to watch them achieve the goals we set out together, and I even wrote a book so I could reach a wider range of the population, from the young to the seniors who might not be able to afford a certified financial planner.

Now here are some of the best pieces of advice I can give you about money.

View As: One Page Slides


1. Beware of FREE money

Credit cards are NOT free money. Use them as you would cash, or don’t use them at all. If you use them to stopgap your life, you will never have financial freedom.

Flickr / Alan Levine

2. Simplify budgeting

It’s simple. Know what you have coming in and going out each month. Do you know this? It doesn’t matter if you do it on a napkin or Mint or an app on your phone. This is so simple, yet so important. It is the building block of all financial planning.

3. Know your worth

Assets (what you own) minus liabilities (what you owe) equal net worth. And your net worth does NOT equal your self-worth.

Always remember that.

Thomas Lohnes / Stringer / Getty Images

4. Don’t be afraid

Personal finance is not just about math, and you don’t have to be good at math to learn it. Simplify, learn the basics, and just get started. It is never too late to learn.

The first step is knowledge. You can’t fix what you don’t know. Learning financial literacy is one piece of education that will be well worth your time.

5. Know your credit score

This is important for your entire adult life, and having a good or excellent score can save you hundreds of thousands of dollars.

Flickr / Mads Bødker

6. Teach your family about money

Financial literacy is a life lesson that should be passed down to your children. Learn it, share it, and your entire family will be better off.

7. Inflation hurts

You have to invest to outpace inflation and get growth on your money — otherwise you’re effectively losing money as time goes by. This means don’t hoard cash, and invest for the long term, which is greater than 10 years.

8. Never lie

Don’t lie about money or spending with your partner. Full financial disclosure is a key to a healthy relationship.

9. Plan for your future

Planning for your financial future is way more important than planning for vacations, parties, etc. Are you spending enough time on your financial future? This is a strategic conversation and you might need to hire a professional financial planner.

10. Just start

There are multitudes of free resources to learn the basics, and you can hire a certified financial planner when your situation gets more complex. Find a planner who suits your needs atLetsMakeAPlan.org.

Cary Carbonaro, MBA, CFP, is a managing director of United Capital of New York and New Jersey. See more about Cary and her bestselling book “The Money Queen’s Guide for Women Who Want to Build Wealth and Banish Fear” at MoneyQueenGuide.com.

Do You Need A Finance Broker Or A Financial Planner?

When taking the plunge into the world of home loans and property investment, the challenge often lies in knowing which expert to approach for help. Mortgage brokers and financial planners, although similar in their professional outlook, cater to different financial endeavours.

Mortgage brokers are qualified and must be either licensed or appointed to act as loan advisers. They have in-depth knowledge of loans and options suitable for a range of different financial situations. They negotiate with lenders to arrange loans and help manage the process through to settlement.

 “When it comes to talking about a client’s debt structure or interest rates, or the best way to set up a loan, it’s really something that needs to be done by a mortgage broker who is qualified to give credit advice,” says Luke Mellar, a lending specialist at Shadforth Financial Group.

Financial planners, meanwhile, assist with anticipating and managing longstanding financial outlook. They help sort through and select options for investment and insurance, with attention paid to retirement planning, estate planning and investment analysis.

“Planners take care of more of the long-term, wealth-creation strategy, as well as super and life insurance, and other sorts of wealth protection insurances,” Mellar says.

A financial planner’s work is wide-reaching and important to your long-term financial health and stability, options relating to loans and refinancing can only be recommended by a qualified broker authorised to do so.

There are some situations where it would be best to include both types of financial professional. For instance, if your broker is helping you refinance your loans in order to undertake a financial investment, a financial planner can step in to assess the best investment option for you.

“There is rarely a time when I am dealing with a client, just on the loan side of things, where I’m not thinking about how it fits with what the financial planner is talking about,” Mellar explains.

“In terms of whether the client’s choice is a viable investment strategy or whether it fits in with their long-term wealth goals, that’s something that we absolutely have to refer back to the planner to make sure that it fits in with their broader plan.”

The answer? It depends on your situation – for loans, see a broker, for investment advice, a financial planner. Of course, your broker can always refer you to a planner if you need one.

Contact an MFAA Accredited Finance Broker to find out how they can help you secure property or commercial finance, and ask them to recommend a financial planner they trust.