Hills District Independent JUNE 2017 #24 - Page 27

real estate Gearing for beginners with Andrew Drane Principal of Harcourts Hills Living and auctioneer at large I see it as part of my brief to ensure prospective buyers as well as vendors get the right advice before they make a move. Though the preponderance of advice we read is for investors, the fact is that most people don’t fall into that category. The Hills is full of professionals and people who are generally successful at what they do, but they’re not always investment- savvy – mainly because many don’t care to waste brain cells thinking about it. But with this recent budget, home owners need to know how it all affects them. For example, it seems that everything is “geared” in favour of the investor, mainly because of this thing called negative gearing of property. Let’s demystify it for the homeowner: negatively is one of three ways of “gearing” property. The other two ways are positive and neutral gearing. Instead of “gearing”, substitute the word “borrowing”. When you borrow in order to invest, you obviously, as with any loan, have to return that money. For the sake of tax breaks, which this last budget preserved, a property investment will run “at a loss” when the return an investor gets on rent for the property is less than their interest repayments and other costs. The other two forms of gearing, then, are now easy to understand. Neutral gearing is when earnings from a property equal those outgoings. Positive gearing is when your income from the property more than covers your outgoings and you can painlessly repay your loans. Now, most people who think negative gearing is some kind of esoteric economic magic only known to the wealthy also believe it has incredible benefits, and makes the rich richer. But it all depends on your situation. For many decades now, Australian tax law has enabled investors who rent properties to receive significant breaks by claiming the interest part of their loan repayments as a legitimate expense. People in higher tax brackets have always found this attractive. Often the income earned from property ownership would need to be significant. If it’s worth doing though, your income/savings “streams” such as savings, extra cash flow, other incomes and the rent you receive all go toward the cost of owning the property. However, the average property owner often just wants to receive income from their property above and beyond their repayments – right now. This, too, is of obvious benefit. You work out your own expenditure and savings, regardless of the THE hills INDEPENDENT www.hdinews.com.au feels like home ATO. Increased buying power enables you to live the life you want, especially if you’re younger. As with those who negatively gear, you still benefit in the longer term from capital growth of your investment. That’s a given, and it’s a good reason to look to invest. We at Harcourts Hills Living sell investment properties all the time, obviously, and as time goes on, we intend to enhance our financial advisory function. Our intention is always to make the entire process as transparent as possible, and we enjoy seeing well- informed buyers and sellers reach their goals. It’s part of the joy of this business. See your financial advisor before investing, find out all about the mechanics of negatively gearing a property, as well as the new capital gains concessions and how to use your superannuation to acquire property. First-timers, discuss with your advisor how the First Home Super Scheme will make saving for a deposit easier. Then come and see us! ISSUE 24 // JUNE 2017 27