Negative gearing has been accepted as a normal part of Australian property investing for a long time.
The basic idea is fairly simple.
Your investment property costs more to own than it produces in rental income, so you cover the shortfall from your own pocket. Eligible losses may then reduce your taxable income.
Historically, plenty of investors were comfortable with that equation.
Borrowing costs were lower, and strong capital growth could make the annual holding loss feel worthwhile over the longer term.
Today, the cost of carrying that property deserves much closer attention.
Mortgage repayments are higher.
Then you still have council rates, insurance, property management, maintenance and the other ongoing costs of ownership.
By the time the rent comes in and those expenses go out, the annual shortfall can become considerable.
And that shortfall has to be funded somewhere.
Usually from the investor’s employment income, business income or cash reserves.
This is where I think the conversation around negative gearing has changed considerably.
The tax deduction may still have value depending on the investor’s circumstances, but it doesn’t remove the weekly cost of owning the property.
You still need to fund that gap.
Week after week.
Potentially for years.
So one of the first questions I would ask when assessing any investment property today is:
What will this property actually cost me to hold each week after the rent comes in?
That question becomes even more important once you move beyond your first property.
If each investment requires another contribution from your household income, those shortfalls can begin consuming a meaningful amount of the money you’re earning elsewhere.
That may affect your lifestyle, your borrowing capacity and how easily you can continue building your portfolio.
It also leaves you more exposed if interest rates remain elevated or something changes with your personal income.
This is why positive cashflow is such an important part of the way we look at property at Ethical Property Investments.
The properties we help our clients invest in are cashflow-positive.
More importantly, we’re looking for properties that can generate high cashflow.
There is a meaningful difference between a property that only just covers its costs and one producing enough rental income to strengthen the investor’s holding position.
That is why we work with strategies such as co-living, dual-key and other high-cashflow approaches where appropriate.
The aim is to have considerably more income coming through the property rather than continually asking the investor’s salary to support it.
For me, that becomes increasingly important when holding costs are high.
You want to understand how much rent the property can generate, what it will cost to own, and what position you’re left in after those expenses are paid.
Because five or ten years is a long time to keep funding a property from your own pocket while waiting for future capital growth to do the work.
Negative gearing may still have a place depending on someone’s income, tax position, borrowing capacity and long-term objectives.
But the economics have become much harder to ignore.
If you’re looking at your next investment, spend some time on the holding side of the equation.
Ask yourself:
After the rent comes in, how much of my own money will this property still need every week?
That answer can tell you a great deal about how comfortably you’ll be able to keep owning it.