Are you borrowing money to invest in property
Borrowing to invest is also known as ‘gearing’ and it can be a risky business. Gearing can increase your returns when markets rise, but losses can be devastating when markets fall.
Gearing simply means borrowing money to buy an asset. In the case of property, you have taken out a loan to purchase a property.
There are 3 types of gearing
This means that the interest you are paying on the loan is more than the income. As a result, you are making a loss.
This means that the interest you are paying on the loan is equal to the income.
This means that the interest you are paying on the loan is less than the income. As a result, you are making a profit.
The positives of negative gearing
So, if negative gearing means that you’re making a loss, how can that be positive?
Obviously, nobody wants to get into property investment to lose money. Even though most property that you will buy will be negatively geared, that is the rental income is not as much as the interest repayment, the benefit comes from the capital growth.
Capital growth from
**This is a general fictional example about Sam & Jane a couple from Brisbane
Imagine Sam & Jane bought a $600,000 property and took out a $480,000 loan at an interest rate of 4%. The annual interest payable on the loan is $19,200. Also, the associated costs of repairs and maintenance and renting it through a local agent is an additional 2% approximately. This equates to an additional $9,600 on top of the interest payable of $19,200, bringing the total to $28,800.
Also imagine that they are earning $500 per week in rent, which adds up to an annual rental income of $26,000.
Based on the above example, they are paying $28,800 in interest and earning $26,000 in rent which means there is a deficit or loss of $2,800 per year. This example is an example of a negatively geared property.
Assuming the property grows at a rate of 6% annualised over a period of 30 years than the property growth would be $36,000 on average.
At the end of one year, the couple would have losses of $2,800 in interest and associated costs but the property but the has increased in capital value by $36,000, which means that the couple are $33,200 richer than they were 12 months ago.
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