Full cost of negative gearing often underestimated
Investors with negatively-geared property may miscalculate their profits and miss out on better opportunities, a mortgage advice firm has warned.
Many investors fail to take into account the holding costs of the property in their calculations, according to Sam Ghoreyshi from Smartline Mortgage Advisers.
“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,” Mr Ghoreyshi said.
Mr Ghoreyshi gave the 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, Mr Ghoreyshi explained.
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, Mr Ghoreyshi warned.
“Even if you do break even, you need to consider what you could have done with that $27,000 over that time,” Mr Ghoreyshi said.
“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.”
He believes, while negative gearing could be a helpful short-term strategy, it is 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,” he said.