Negative Gearing May Not Be a Lucrative Strategy
Are you a lobbyist of negative gearing or a devout follower of positive gearing? The much talked about; hotly debated strategy of the property market- negative gearing- relies on capital growth. In times when the market runs through the course of several cycles without exhibiting substantial capital growth, the very idea of negative geared properties can fall flat on its face. This, though, is not the entire problem. Let us probe the issue further.
Negative gearing is a tax-saving strategy
Let me first highlight why negative gearing is not an investment strategy per se. At best, you can only refer to it as a tax strategy. When your rent does not fully cover your mortgage payments, you have to bridge the deficit through your own salary or income.
You can furnish this loss to the tax department to get deduction on your taxable income. It is only befitting to realise that the deduction, for all it is worth, can still fall short of curbing your full losses. Once again I have to say, this is not all. There is more to the negative gearing story.
The question of equity
If you are an investor and dream of a big portfolio you cannot always use cash for the upfront fee on your property. This is where equity can be of great help. The equity you build in a property can help you in fetching a loan. However, this equity entirely depends upon the kind of capital gains your property has shown.
If you have invested in only negatively geared properties, how are you going to manage further expansion of your portfolio in case there is no or negligible capital growth in your existing properties. Is there a passive rental income you can bank on to pay for your newly acquired properties (mortgage or upfront)?
What if you lose your job?
Moreover, have you ever imagined a situation where you lose your job or your salary is decreased for some reason? Such things keep happening to people and somebody else’s story can become your story, too. So how will you pay off your mortgage given that your rental returns do not cover them completely? Think!
Between rental yield and capital growth, which do you prefer?