InvestReal Estate

5 Negative Gearing Tips for Entrepreneurs Investing in Property

3 Mins read
  • Negative gearing is an important real estate investing consideration as an entrepreneur.

As an entrepreneur, you are going to need to know how to get the most value out of all of your capital. Physical real estate is an important form of capital that all business owners should try to leverage effectively.

Some business owners invest in real estate, because they need it to operate their companies. Others invest in real estate as a business in and of itself. Real estate investing businesses have become promising opportunities during the pandemic.

Regardless of the business model that you are pursuing as an entrepreneur, you need to know the ins and outs of property management. One thing that property investing entrepreneurs need to understand is negative gearing.

Negative Gearing is an Important Consideration for Entrepreneurs Investing in Property

The common goal of property investors is to make a profit. In many places around the world, including Australia purchasing a damaging gearing property is a way to leverage tax benefits against profit and capital gains. Although this strategy can work, it is risky if you don’t know what you’re doing. It’s essential to understand how buying a negatively geared property works and get professional advice from your financial advisor.

Negative gearing is a reasonably simple strategy when it works. An investor first borrows money to purchase a property where the gross profit is less than the cost of ownership and management. The advantage comes when the investor can write off the property’s profit loss as a tax deduction on their income. The other benefit is that although an investor may not profit on their rental income, the property ownership may result in a capital gain.

There are many benefits and pitfalls to buying a rental property. To understand the rewards of negative gearing, you need to understand the risks and the process. Let’s take a look at a few critical things that property investors should know about negative gearing.

Owner Structure

Negative gearing as a strategy is only effective if your property has the proper ownership structure. Three ownership options give you the best chance of success. A self-managed super fund, a trust, or joint ownership are the critical structures for negative gearing to work with your investment property. Considerations such as the potential future earning of partners and other taxable income are essential in deciding which format you will choose.

Financing

One of the most important factors of making a negatively geared investment work to your advantage is having the right financing. You need to have a loan that includes tax-deductible interest. Your rates may be fixed or variable depending on your loan. Without the right loan, your repayment schedule could end up lacking the flexibility needed to earn the right tax savings. Your loan should include the ability to make lump sum payments, or it could cost you some of your profit in early payment fees.

Cash Flow

When you use a negative gearing strategy, you will not see any profit until you finalize your property’s sale. Your annual losses on your investment still need to be covered while you own the property. When you have planned to accept an annual loss on your investment, you need to ensure that you have sufficient cash flow from other sources to cover the shortfall.

Location

One of the most important keys to success with negative gearing is investing in the right property at the correct location. The basis of this strategy is to reduce your tax burden and increase your income through your capital gains. If the property you invest in doesn’t increase in value, you will be looking at losses on multiple levels. Choosing an investment property in an area that is just beginning to see growth or is going through a gentrification process could be the key to a winning negative gearing process. It’s imperative that you discuss your needs with a real estate expert that gives you a better understanding of the market and where the best investment is located.

Professional Advice

Launching a negative gearing purchase on your own can be risky, especially if you are new to the property investment world. Rely on others’ expertise, including a tax advisor, real estate agents, your financial advisor, to give you the best guidance and advice.

Negative gearing can be a profitable investment strategy when you get it right. Essential factors, including the investment location, owner structuring, your cash flow situation, and financing options, should all be given careful consideration. Get the best advice from your team of experts to help you create a winning negative gearing investment.

Entrepreneurs Must Understand Negative Gearing when Investing in Property

As an entrepreneur, you must know everything that you can about invest in real estate. You can’t afford to overlook the importance of issues like negative gearing.

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Ryan Kh is a big data and analytic expert, marketing digital products on Amazon's Envato. He is not just passionate about latest buzz and tech stuff but in fact he's totally into it. Follow Ryan’s daily posts on Catalyst For Business.
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