Why do people use real property investment?.
Investment in property is most important investment instrument in Australia, as you know the richest 200 people's wealth is based on the real property. Although property must be viewed as an illiquid investment because the transfer costs of properties are high and the selling period averages several months, according to steady profit return and low risk, many people buy in property to against currency inflation, and to compensate increasing life expense contrasted to decreasing social security after retirement.
How does it work?.
Negative gearing.
Gearing basically means borrowing to invest. An investment property that's negatively geared is purchased with a loan that has an annual net rental income amount that is less than the annual interest paid on the loan, plus the deductible expenses associated with maintaining the property. You get tax benefits by being negatively geared as you are able to deduct the costs of owning an investment property from your overall income. The biggest part of this deduction is the interest portion of your mortgage, but you can also claim such expenses as property management fees, loan costs and repairs.
Because negative gearing deductions offset your income, they are most beneficial to high-income earners. What this means is the more you borrow, the more interest you pay and the bigger your deduction. While everyone wants a large tax deduction, you shouldn't over commit yourself in order to get one. You still have to make the mortgage payments and those lucrative tax benefits don't arrive until the end of the financial year. In periods of low inflation, the benefits of negative gearing are usually negligible. (Case study: Mr. Bill teaches accounting in TAFE. He is interested in a 2 bedrooms unit in Parramatta, which costs $360,000. His annual salary is $50,000. He gets $376,190 mortgage at 6.29% p.a. from Wizard home loan, calculate how much money he should spend weekly to obtain this property.
