Negative Gearing is a form of financial leverage where an investor borrows money to buy an asset that produces income and, in this instance, the income generated by that asset does not cover the interest on the loan. The investor is then left to fund the shortfall until the asset is either sold or becomes positively geared.
In simple terms, negative gearing is using someone else’s money to buy an income-producing asset. The commercial nature of the loan means that you pay interest on the loan.
These interest payments on the loan are more than the income you are getting from the asset. It was from this concept that the term for negative gearing was born.The word negative is used to describe the minus in the equation of the income not equalling the income; rather than the fact that it is a negative form of the leverage. When you think about it, how can it be negative when someone else gives you money that you do not have, charges you a small percentage of that overall amount of money borrowed, and allows you to grow wealth?
To have capacity to negatively gear assists in wealth creation. It is not a get rich quick scheme; it is a paced investment strategy that moves us from a negatively geared property into a positively geared property with the end game being capital gains.
There is also a great incentive to maintain your properties when negatively gearing. For one thing, after the first five to ten years, the bulk of your depreciation on the internal fixtures and fittings drops away. Be wary of making large claims for maintenance in the first few years of owning a property. These can be seen as capital improvements rather than maintenance.
(An extract from Lynne’s upcoming novel – ‘The Formula’)