The Pros And Cons Of Negative Gearing Investment Property

You might have already heard about negative gearing investments

. It's always one of the topic of property workshops where they present it as a cure all for the risks of investing your money into houses and apartments. But on the other hand, critics claim that it can be much more risky than it looks, and leaves you more vulnerable to the ups and downs of the property market to a great extent. So, which view is actually correct? How does this financial device really work? And more significantly, should you utilize it?

The purpose of the negative gearing approach is to minimize your financial risks, by finding means to offset the cost of interest on a mortgage when the profit from the sale of a property does not equal. This process has two aspects.

The first and most significant consists of placing the shortfall against any increases in the value of the property. In theory, the usual upward trend of the values of the property means that any temporary loss of income should be covered by this sort of rise, making your investment a relatively secure one, and limiting your exposure to additional costs.

The second aspect of the process consists of making use of tax laws to offset costs against your overall tax payable. This process is separate, but can frequently be helpful in offsetting minor losses and making them profit neutral. The exact details will vary according to your individual position, and as such is something you should seek professional tax advice on.

For the critics, the main difficulty with this sort of approach comes with the susceptibility of the investment to unfavourable market situations. So, if the prices of the properties decline, as has occurred in numerous occasions in the past, then there is nothing to offset the deficit to, and you'd have to look for other sources to cover them up such as a salary or other investments. The worst part is that during economically challenging times, that is when a shortfall in income from the property is most likely, and the point when you can least afford to be paying additional money for your investment.

In theory, you could try to wait until things pick up, and in the meantime use your salary to fund any additional costs until prices get stable enough not to cause any problems anymore. However, this approach would be dependent to a large extent to your capacity to meet the payments, and you might find yourself in a position where you have to sell just to avoid the extra costs. This can cause you to sell the property at precisely the time when prices are down and profits would be very low.

So, is the negative gearing investment property approach a desirable one to employ? As with any scheme, you have to realize that there is no magic formula to make money without any sort of risks. Unfavourable business climate occurs anytime to create serious problems. Yet, in good market conditions, it can be an effective way to minimise your exposure to costs. The key is to fully understand the implications first before making any decisions.

And, if you want to learn more details about the negative gearing investment property approach, take this opportunity to get FREE access to Greg J. Hamlyn's Investment Consumer Guide (value $47). You can access this consumer guide by clicking or visiting: http://www.firststephomes.com.au.

by: Greg J. Hamlyn

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