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So one of our fellow unintelligent investors asked me a bit about property investment about a week ago so I’ve decided to type a post about what I think briefly.
Property investment is definitely something that I’ll get into when I have enough of an active income and capital to sustain it. For now, I think I’ll stick to stock market trading.
That reader mentioned that if you bought a property, you can take up a loan and use rental income to cover the repayments. That is true but I think you’ll have to be really lucky or good to get enough of a rental income to cover your repayments. If your tenant can afford to pay you a rent that is higher than a mortgage, wouldn’t it make more sense for him to take the loan in the first place? But of course there will be times where your rental income is higher than the loan.
So what happens if your rental income is lower than your loan payments? This can be a really good thing especially if you’re paying a lot of taxes. It is called negative gearing. What that means is that you take a loan, hence gear, and make a loss because of the loan payments. That loss is then used to offset your taxes. As a result, you pay less tax. So then how to you make a profit by negative gearing? Do your research very well and hope you buy a property that will appreciate in value. That way, your losses is used to offset your taxes and the capital gain is used to offset your losses. The end result is a gain! Of course you’ll be in trouble if you negative gear and your properties depreciate in value at the same time.
Positive gearing is what the reader was talking about. So you take a loan and make enough of a profit from your rental income to cover your loan repayments. So you’ll be paying taxes for your profit and your capital gain if you decide to sell the property. If done correctly however, negative gearing can be more profitable than positive gearing because of the tax offsets.
Negative gearing can be applied to stock market investing as well. All you need is a margin loan account. Take a margin loan from your broker, the repayments can be used to offset taxes and if the shares you invested in appreciate in value, you make a profit.
So this is just a quick post mainly about negative gearing because I think when I finally get into property investing, this is what I’m gonna be doing. By no means am I encouraging you to take a margin loan or negative gear because once again, gearing brings a whole level of risk and more risk is added on top of that if you negative gear.
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p.s. my trading places portfolio got hammered this week. It will be quite embarrassing to post it up tomorrow. lol thanks for reading!