Negative Gearing - How It Works

I always ask new investors this question…. What makes more sense? Buying a new car that costs you $164 per week that devalues the moment you drive it out of the showroom?

OR… starting at the same amount of around $164 per week, purchase an investment property for $700,000 that could well double in the next 10 to 15 years? 

According to the Australian Government Treasury website, the term negative gearing “is commonly used to describe a situation where expenses associated with an asset (including interest expenses) are greater than the income earned from the asset” Source https://treasury.gov.au/review/tax-white-paper/negative-gearing 

In other words, if you’re earning an income and paying tax, you may be able to offset the costs associated with an investment on the tax you pay……provided you qualify, of course.

In addition, I will suggest ways how to pay your existing residential mortgage down quicker, while building equity in your investment property.

So how does it work? The following is a brief snapshot. The full analysis will be shown to you during a Zoom meeting.

House & Land package price: $691,600.
Rent: $600 per week.
Purchase Costs: Around $19,884. (Includes stamp duty (payable only on the land value), transfer of title and conveyancing).
Deposit: 10% $70,000 (possible to use home equity).
Loan Amount: $648,560. Term 30 years, first 10 years interest only).
Interest Rate: 6% p/a (Rates vary. Check www.finder.com.au) 
Your Income: $90,000

Based on the above snapshot, the weekly contribution to service your investment property?
YEAR 1: $164
YEAR 2: $157
YEAR 3: $150
YEAR 4: $142
YEAR 5: $133
YEAR 10: $94
YEARS 11 – principal payments kick in: $310, 12: $295,000, 13: $289, 14: $282 etc (meaning you are now paying your loan down and building more equity in your investment)

IMPORTANT NOTE: The above example is not financial advice. Please seek advice from your financial professional.