Negative gearing is a part of life for Australian investors, and a property buzz word. So what is it?
Capital growth from negative gearing
Imagine you bought a $440,000 property and took out a $400,000 loan at an interest rate of 7%. The annual interest payable on the loan is $28,000.
Also imagine that you are earning $430 per week in rent, which adds up to an annual rental income of $22,360.
Based on the above example, you are paying $28,000 in interest but only earning $22,360 in rent which means there is a shortfall of $5,640 per year. That’s the bad news.
The good news is that the property should be going up in value and it is worth more as time goes on. If the property went up in value by 10% in a year, it has increased its value by $44,000.
At the end of one year, you have paid out $5,640 in interest but the property has increased in value by $44,000, which means that you are $38,360 richer than you were 12 months ago.
Source: How Negative Gearing Works