Property investment in Australia has long been regarded as a lucrative avenue for wealth creation. While many factors contribute to the success of property investment, understanding the concept of gearing may be crucial for making informed decisions. Gearing, in the context of property investment, involves borrowing funds to invest in real estate assets with the aim of generating returns.
This article aims to shed light on what gearing means in property investment in Australia, including its types, potential benefits, and considerations for property investors.
What is gearing?
Gearing, also known as leverage, refers to the use of borrowed funds to finance an investment. In the context of property investment, gearing allows investors to amplify their purchasing power by using borrowed money to acquire an income-generating property. By utilising gearing strategies, investors may be able to benefit from the potential capital growth and rental income of the property while leveraging the equity they possess.
Types of gearing on an investment property
Positive gearing occurs when the income generated from the rental property exceeds the interest repayments on the borrowed funds. A positively geared property may provide investors with surplus cash flow and, therefore, may be an attractive option for those seeking immediate income from their investment. Positive gearing typically requires a property with high rental yields, like NDIS properties!
What is negative gearing?
Negative gearing arises when the income generated from the investment property is less than the interest repayments and other expenses associated with the property. This property investment strategy typically aims to offset the losses against taxable income, resulting in potential tax benefits. Investors relying on negative gearing generally anticipate a capital gain in the long run to compensate for short-term cash flow deficits.
The potential benefits of gearing in property investment
Gearing might allow investors to access a larger pool of funds than they would otherwise have available. If so, the increased purchasing power may enable investors to acquire investment properties of higher value or diversify their portfolio, potentially enhancing the overall return on investment.
Property values in Australia have historically shown long-term appreciation, and gearing may amplify the capital growth potential. By using borrowed funds to invest in property, investors may be able to benefit from the growth in property values, potentially generating substantial wealth over time.
Negative gearing, in particular, may offer potential tax deductions or benefits by allowing investors to claim a tax deduction on the losses associated with the property against their taxable income. This may lead to a reduction in overall tax liability and improve cash flow, especially for investors in higher tax brackets or those facing capital gains tax. If you’re thinking about negative gearing for an investment portfolio, it’s a good idea to speak to your accountant or financial adviser.
Considerations for investors before using gearing
Gearing involves taking on debt, which potentially increases the risk associated with the property investment. Conducting thorough research, seeking personalised advice from a financial practitioner (such as a financial adviser) and performing due diligence on the property may be essential steps to help mitigate risks.
Are NDIS properties positively geared or negatively geared?
Whether your investment property portfolio is a negatively geared property or positively geared will depend on your personal financial situation and goals. At Apollo, we only consider positive gearing for NDIS properties. This is because rental properties offered under the specialist disability accommodation (SDA) typically have a high rental yield, which means the properties generate a highly positive cash flow position for the investor.
If you’re a property investor looking for a positively geared property that can make a difference in the life of an Australian with disability, book a call with the team at Apollo Investment.