When you’re investing in property, you need to know whether you should be aiming for positive or negative cashflow. This should all be part of your investing strategy and will have implications on your tax.
This occurs when the property earns more from rental income than it costs you to hold it. This is a great strategy for new investors or for those close to retirement when you want your costs to be as low as possible.
Even though technically it won’t cost you anything to own the property, you will need to make sure you have the ability to weather any unexpected expenses like rental vacancies and maintenance. Also, sometimes, the property isn’t positive cashflow unless you include the tax benefits – so it may cost you a minimal amount over the course of the year, but you’ll catch up at tax time.
Positives: The biggest positives here are the passive income and the neutral impact on your cashflow.
Negatives: Being unprepared for unexpected costs is the biggest risk, and, just because it’s positive cashflow when you start, it doesn’t mean it will always be that way. If there are high maintenance costs, an increase in interest rates, changes to your taxable income, or a slump in rental yield, then it may become negatively geared.
This strategy focuses more on the capital growth potential than the income generated from the property. If the rent and tax benefits don’t cover the cost of holding the property, then it’s negatively geared. Generally, this a great strategy for high income earners looking to reduce their tax obligations.
The investor relies on the increased property value offsetting the expenses incurred and it’s usually a long term investment to ensure maximum return.
Positives: Claim losses as a tax deduction.
Negatives: Expense of holding the property and the risk that tax policies or your earning capacity changes and you’re left with an underperforming investment.
As always, this isn’t financial advice – it’s just information that will help you decide on your investing strategy. A visit to your financial planner, accountant or tax adviser is always a great thing to do before you invest in property or make any major financial decisions.
But you know where to come for the money, right!