Negative Gearing
Negative Gearing occurs when the cost of owning a property - Interest, bank charges, council rates, maintenance, repairs and capital depreciation is greater than the income that it produces - the rent. This cost then becomes a tax deduction for the investor so that they do not have to bear the full loss. But the reason that investors negatively gear property is because the asset values have generally been doubling every 7 - 10 years, and over the same time rents have been increasing. So while a property might be negatively geared in its first few years eventually it will turn positively geared once the rents have caught up.

The reason that negative gearing is so popular with investment properties is that you can usually borrow up to 95% of the properties value, in some cases 100%. What this means is if you have $30,000 to invest you can borrow around $300,000 after taking into account around $15,000 in buying costs. With shares you can borrow up to around 75%, which means that if you had the same 30,000 to invest you could only borrow $120,000 to invest in shares or managed funds.






Risks Associated with Gearing
There are risks when you are using a leveraged product. Gearing can magnify your profits, but it can also magnify your losses. Generally only investors that can absorb the costs of short term falls in prices or increases interest charges should consider negative gearing.

There are many ways to minimize risk when it comes to property investment these can include:

• Buying a property in a proven location with limited land supply.
• Not overpaying for the property when you buy it.
• Consider buying property that you can immediately add value to through small cosmetic renovations.
• Buy relatively new property to claim the most deductions.
• Take out mortgage protection insurance to cover yourself against loosing your job.
• Have an interest buffer in your loan so you can cover 3-6 months in interest payments if required.
  

Don t forget to check out the common deductions available to property investors by clicking on "Common Deductions" on the left.