Risks to Consider When Negative Gearing

You may be able to buy a larger investment property using negative gearing than if you did not use gearing at all. There are associated risks and the following are some questions you may wish to consider:

• What if you have difficulty finding a tenant and the property is vacant for long period?
• What if a tenant trashes the house? Insurance does not always cover the full cost of repair.
• What if there is an unexpected downturn in the property market and the expected capital gain is not achievable?
• What if a government body resumes the property to build a dam or road or power line?

You should also consider the risk of cash flow shortages, especially if you are considering multiple negatively geared investments to build a property portfolio:

• Can you find the cash to cover short-term losses?
• If you are unable to service your loan, you may suffer huge penalty interest and fees. You could even face repossession.

The risk of interest rate rises needs to be taken into consideration. Unless you are fixing the interest on any investment property loan, you need to allow for possible rate rises in your plan.

Finally, have you considered that tax law may change? While you can claim investment losses as a tax deduction at the moment, government reviews of housing affordability might determine that allowing investors to claim losses against other income is inappropriate. Depreciation allowances may change. Capital gains tax might increase or the calculations methods could be altered. Rules allowing distribution of capital gains to family members on low incomes might change, or become impractical to use.

Your financial adviser can help you consider all the risks associated with your proposed investment.