Economics and Real Estate

What is gearing? Explain Negative Gearing and Positive Gearing.

Gearing is borrowing money to invest (mainly in investment properties). The income can be either positive or negative gearing:

Positive Gearing: When rental return is higher than interest repayments & other property-related expenses (e.g. strata levies, council and water rates). Benefit: Profit but can be subject to net rental income tax.

Negative Gearing: Return is lower than expenses. Benefit: Any net rental loss (maintenance costs, repairs, mortgage interest and rates) may be offset against other income you earn (salary). This reduces your taxable income.

What is Capital Gains Tax (CGT)?

Tax on any net profit you make when you sell the property. If you profit from the sale, it is a capital gain and the tax on that amount is the CGT.

What 4 Factors impact whether to negative or positive gear?

1. Personal circumstances

2. Current income

3. Debts

4. Risk Preferences

LVR

Loan to Value Ratio (%)

Benefits of buying an investment property?

Tax Benefits

What 3 Factors makes for a good investment property?

1. Transport Links

2. Proximity to schools

3. Rental demand.

TIP: Look for suburb that offers potential good capital gains and high rental returns.

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