The term ‘negative gearing’ is currently used in the media consistently and is the one concept that people often assume they know enough about without properly educating themselves.
A common misconception is the belief that Negative Gearing is when you lose money to own a property. This misunderstanding is derived from the common confusion between the concepts of negative gearing and negative cash flow. While some properties will cost you every week, a carefully structured strategy can ensure you are purchasing the right investment properties that utilise negative gearing to create positive cash flow. As cash flow is king, adopting the negative gearing strategy will create more opportunities for your ability to afford future investments.
I personally implemented this strategy recently when my parents sought my advice for a retirement plan. They are both within 10 years of retirement, but still owe just over $300,000 on their home mortgage, and they wanted to ensure that they could comfortably retire.
While they would have ideally purchased investment properties 10 or more years ago, the strategy of owning a cashflow positive property through negative gearing will still allow them to retire comfortably. Whilst many steps are required and everyone’s situations require personalised strategies, here are some of the steps I applied to assist my parents:
- Refinance: The first step was to get their finances sorted by refinancing their existing home loan. Through refinancing we saved my parents $270 per week (or $14,040 per year);
- Property selection: I researched the best area that met their finance capabilities and secured them a stunning investment property for $570,500 located in a high-growth area of Queensland. This property had a minimum estimated rental return of $510 per week. Before we implemented the next step, the property would be costing them around $125 per week (or around $6,500 per year);
- Negative Gearing: Now for the exciting part, I selected the above property due to its high-quality standards, allowing high claimable depreciation’s. They will now be able to claim back approximately $10,000 extra in their tax returns. We advised them to set up a tax variation that will allow them to receive an extra $182 back per week in their pay packets (this equates to around $9,500 per year).
The above strategy will allow my parents to receive an extra $57 every week (or around $3,000 a year), while owning a property that has the potential to earn them at least $350,000 over the next 10 years.
As you can see, the best part of all of this is by owning a cashflow positive property through negative gearing, you are effectively making money in two forms; one from the extra income you receive each week, and the other from the extra capital growth that negatively geared properties normally bring you.
In summary, my parents were able to save $270 a week through refinancing plus $57 a week through owning the positive cash flow property which equated to a total of $327 a week (or just over $17,000 every year) all of which they are directing straight to their home loan to help pay it off faster.
So, when looking for your next investment, make sure you look at the best strategies available that will suit your financial position and help you to meet your financial goals.
If you need help with any of this or would like to learn more, than fill in the form below and we will be able to help show you the best strategy for your situation.