Full cost of negative gearing property is often underestimated

Investors with negatively-geared property may miscalculate their profits and miss out on better opportunities.

Many investors fail to take into account the holding costs of the property in their calculations.

Assuming a 37 per cent marginal tax rate, a negatively-geared investor is spending $1 to get 37 cents back, in the hope that the 63 cents they’re spending out of pocket will be made up by future capital growth – that’s the only place it can come from.

An example of an investor holding a $400,000 property, negatively geared by $10,000 a year.

At a marginal tax rate of 37 per cent, this investor would still be out of pocket $6,700 a year.

If the investor wanted to sell after four years, the property’s value would need to grow to $427,000 just to break even.

However, this is not the only cost the investor will face.

Even if you do break even, you need to consider what you could have done with that $27,000 over that time.

It may well be that you could have done something more positive with that money will add greater long-term benefit to your financial position.

While negative gearing could be a helpful short-term strategy, it maybe unsustainable beyond five to seven years.

Things need to turn in your favour at some point and the sooner the better. At some point you want to have a smile on your face, knowing you’re truly making money.


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