Negative gearing, particularly with property, can be an effective strategy for investors if the value of the property appreciates enough over time to deliver a strong capital gain.
However, as wealth management partner at HLB Mann Judd, Jonathan Philpot, points out, this isn’t always the case, as many investors have experienced during current market freefalls.
For Mr Philpot, these investors with long-term aspirations could be exploring other tax-effective vehicles at their disposal, like superannuation.
“Using gearing to build wealth can be risky, and negative gearing into property carries a higher risk without a guarantee of a greater return opportunity.
“A negative gearing strategy can pay off... but this isn’t always the outcome. And the capital costs of running and maintaining an investment property can be high,” said Mr Philpot.
Considerations for super savings
Given the restricted concessional contribution limits of $25,000 a year that applies, investors cannot deposit a large sum into super.
Rather, investors should view this as a long play, as they would with property investment.
“One smart strategy is to begin this from the age of 40, with the aim of building a super fund up to the $1.6 million balance cap limit,” said Mr Philpot.
Many Australians view superannuation as an illiquid asset, as it is locked away until retirement.
However, Mr Philpot reminds investors that by comparison, property also doesn’t have a high liquidity value.
“Property is an illiquid asset and investors can only access the capital upon the sale of that property,” he said.
“The income generated from rental is generally low – often at around 3 per cent per annum or less – and this income is often being utilised to meet loan repayments,” he said.
“For a property investment to achieve its potential, it should be at least a 10-year holding, meaning the wealth invested in a property can also be viewed as locked away,” he said.