20th June 2007

Dear Investor,

Negative Gearing - is it a positive investment?

Negative gearing is a popular investment strategy that doesn’t require the acquisition of a university degree to understand. But is negative gearing as positive as commonly believed?

In basic terms, negative gearing is borrowing money to acquire an asset where in the short term the interest payments and other holding costs exceed income from the asset, which generates a tax deduction. In the longer term, the capital gains achieved from the investment outweigh the losses and, as a consequence, an overall positive investment return is achieved.

While in years past, owning your own home outright was the major investment and security goal the average family aimed for, it is now commonly viewed as a ‘wasted asset’ as it does not provide any return or valuable tax relief.

So, the temptation is to do more with your money.

It is becoming increasingly popular to borrow funds to invest into a loss-making asset for negative gearing purposes, such as property. Potentially, this appears to be an attractive strategy because property is an investment that we are familiar with and it is easier to understand, compared to the share market, managed investments or even superannuation - but is the strategy as attractive as it first appears?

What investors need to be mindful of when considering negative gearing is the cash flow required to cover costs even before a tax deduction is claimed or a capital gain is realised. Unexpected expenses can arise such as maintenance costs or the anticipated rental income may not be realised, if the property is not rented for sometime. These issues are even more relevant in the event of an economic downturn and can have severe consequences for investors.

Recent statistics show a $4.1 billion gap between rental income and the costs landlords claimed in their 2004-05 tax returns. This is almost a 50% increase from the previous year with the gap being $2.8 billion in rental property losses.

For negative gearing to work, you must be able to service all maintenance expenses and borrowing costs during the term of the investment, otherwise you may have to sell the property before it has been able to achieve the desired capital gain.

And even when you come to sell the property, you have to take into account the potential capital gains tax implications of selling the property. Will you have achieved sufficient capital gains to make up for the losses incurred during the investment term and the capital gains tax that you may have to pay?

Negative gearing, or what commentators have called “losing to make money”, is not as simple as it might first appear, and, like any investment strategy, even where the investment is in something that appears conservative and familiar like “bricks and mortar”, researching and gaining an understanding of the complexities of the strategy before committing your hard earned money is the key to a prudent investment.

Best regards,
Chris Andrews


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Chris Andrews
Head of Funds Management

t  +61 3 8610 2811
e  candrews@latrobefinancial.com.au

Chris Andrews is the Head of Funds Management for the La Trobe Group and has responsibility for the La Trobe Australian Mortgage Fund.
Read full profile here.

La Trobe is one of Australia's leading independent specialist mortgage Financiers. Its business includes residential mortgages, commercial mortgages, and investment services operating one of Australia's largest Mortgage Funds under AFSL 222213. It employs over 115 staff and has raised over AUD$10Billion to assist over 100,000 customers since inception in 1952.

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