Our Backyard – Torquay

Greetings from the team at Great Ocean Road Real Estate, Torquay

How Negative Gearing Works

Negative gearing is a part of life for Australian investors, and a property buzz word. So what is it?  Gearing simply means borrowing money to buy an asset. In the case of property, you have taken out a loan to purchase a property.

  • Negative gearing means that the interest you are paying on the loan is more than the income. As a result you are making a loss.
  • Neutral gearing means that the interest you are paying on the loan is equal to the income.
  • Positive gearing means that the interest you are paying on the loan is less than the income. As a result you are making a profit.
  • So, if negative gearing means that you’re making a loss, why is that a positive?

Obviously nobody wants to get into property investment to lose money. Even though most property that you will buy will be negatively geared, that is the rental income is not as much as the interest repayment, the benefit comes from the capital growth. Let’s look at the example below to clarify this point. There are other expenses related to owning property but I will keep this example simple and focus on the interest expenses.

Let’s imagine you bought a $440,000 property and took out a $400,000 loan at an interest rate of 7%. The annual interest payable on the loan is $28,000. Let’s also imagine that you are earning $430 per week in rent, which adds up to an annual rental income of $22,360. Based on the above example, you are paying $28,000 in interest but only earning $22,360 in rent which means there is a shortfall of $5,640 per year. That’s the bad news.

The good news is that the property should be going up in value and it is worth more as time goes on. If the property went up in value by 10%, it has increased its value by $44,000. At the end of one year, you have paid out $5,640 in interest but the property has increased in value by $44,000 which means that you are $38,360 richer than you were 12 months ago.

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. To clarify your own cash flow position don’t forget to include all the other property related expenses and any tax return income. In summary, negative gearing works IF the money you make from the capital growth is greater than the loss you make in rental shortfall.

If you would like to know more about negative gearing speak with a trusted Financial professional. If you would like to speak with a trusted Real Estate professional about your next investment property talk to Ben Jackson or Geoff Bennett who will be happy to help you find the right investment property for your personal situation.

 

Look forward to seeing you on the best Coast!

Kind regards,

Ben Jackson, Lisa Wiggins & Geoff Bennett

 

Open For Inspection This Weekend

Saturday 26th October, 2013

11.00am – 11.30am

12.00pm – 12.30pm 8 Driftwood Place, Torquay

12.00pm – 12.30pm 29 Bombora Street, Torquay

12.00pm – 12.30pm  111 Ocean Blvd, Jan Juc

1.00pm – 1.30pm 30 Centreside Drive, Torquay

2.00pm – 2.30pm 11 Gleneagles Close, Torquay

2.00pm AUCTION 3/105 Great Ocean Road, Anglesea

3.00pm – 3.30pm 24 Glengarry Drive, Torquay 

Sunday 27th October, 2013

12.00pm – 12.30pm  111 Ocean Blvd, Jan Juc

2.00pm – 2.30pm  24B Munday Street

Head Shot Torquay

Ben Jackson 0419 375 285, Lisa Wiggins 0428 166 101, Geoff Bennett 0458 513 860

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