Property Investing Part 1 – Negative Gearing

Ok so you have heard the investment advice before – buy an investment property and negatively gear.

But how does it work in practice?

Lets say you buy a 1 bedroom unit in Sydney for $300,000. It is rented at $300 per week ($15,600 a year).

You have 10% deposit of $30,000 and you borrow 90% (interest only loan 270k @ 7%). You would pay $18,900 interest. (which is higher than the rent!)

You would also have to pay expenses – council rates, strata rates, water rates, (and other bits and pieces you might have) – lets say $4,000.

So your net tax loss is $7,300. Assuming this was an interest only loan this is also the cash paid throughout the year. (If it were principal and interest you would have paid principal off the loan each month which you can’t claim as a tax deduction).

Assuming you are on the 30% tax rate – this should be an extra refund in your pocket of $2,190 ($7,300 deduction x 30% tax).

So although you have spend $7,300 you have got back an extra tax refund of $2,190 = $5,110 cost to you. Still not great but….

If the unit goes up 5% in the year then it would be worth $315,000 – you have made money (on paper $15,000 value increase is more than costs put in).

Even if the unit stays the same – in 10 years it probably would have gone up. If you are paying $5k a year to run the unit and in 10 years you sell the unit for $350,000 – you have technically made a loss ($300k cost + $50k money put in + Buying/Selling fees = LOSS!).

However even if you do make a loss on paper – If you sold/refinanced you would have $40k to play with/invest into the next property, etc.

And $40k is a lot more than you could have saved on your own (lets admit it!).

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