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Considering investing? Get your head around ‘gearing’



Australians love bricks and mortar. Not only is home ownership the great Australian dream, but when we have spare cash to invest or have paid off the mortgage and want to put our equity to work, many of us turn again to property, buying for investment.

Who is investing?

While the term ‘property investor’ conjures visions of an individual with a broad property portfolio, it actually applies to many of us. According to the Real Estate Institute of Australia, the latest taxation statistics show 14.9 per cent of taxpayers are investors in the residential property market.

The majority of those are ordinary “mums and dads” with only one investment property. In the latest available statistics, 2010-11, 73 per cent of investors had only one such property. And in the previous five years there was substantial growth in the number of such investors.

What is negative gearing?

For most of us the attractions offered by negative gearing – the ability to claim a tax deduction for expenses such as mortgage interest and maintenance costs associated with an investment property – are an attraction. If the cost of owning the property is greater than the rental income, that loss can be offset against other taxable income.

In 2011-2012, 70 per cent of property investors who benefitted from negative gearing earned a taxable income of up to $80,001 a year.  This figure increases to 80.2 per cent if individuals earning less than $100,001 are included. This shows that negative gearing affords a range of Australian households with the opportunity to invest in property.

Is negative gearing good or bad?

While there has been much debate about negative gearing and its impact on housing affordability, evidence has shown that negative gearing has added to the nation’s housing supply with $7 billion a year currently being invested in new dwellings. Negative gearing has also placed downward pressure on rents through an increased supply of rental properties.

Despite pressure the Federal Government left the current negative gearing provisions unchanged in the 2015-2016 Budget, providing ongoing support to property investors.

What should I look for in an investment property?

The same principles apply when buying an investment property as when buying your own home. In particular, any purchase should be underpinned by thorough research – including viewing the property, preferably several times.

1. Do your research: After deciding on preferred locations and whether to buy a house or apartment, start by checking out median prices in those areas. Consult your bank, draw up your budget and be clear about your maximum price. There are many great properties out there, do not be tempted to exceed your maximum if you find “the right” one.

2. List your essentials: Make a list of features you must have and those on which you would compromise. Remember: this is a rental; those criteria may be very different from those for your home. For example, you may be willing to spend time on a high maintenance, hard-to-clean home, but a rental property should be hard wearing and easy to maintain.

3. Consider the dweller: Think about what would make your property attractive to tenants. For example, you may enjoy driving to work, but for a rental property proximity to public transport is essential. If buying a family home to rent out, is it near schools? If buying a trendy apartment, tenants will want cafes nearby.

4. Exclude emotion: Most importantly, put aside emotion. When buying your home you are looking for “the one”. But you don’t have to love your investment property – it is doing a job for you and must be chosen for its suitability to do the job well.

 

 Enzo RaimondoAbout the author: Chief Executive Officer since 2000, Enzo Raimondo is the dynamic force behind – and the public face of – the REIV. Raimondo has led the Institute to become the authoritative source of information for the Victorian property market.