A negatively geared investment property is a common strategy discussed in New Zealand property investment, often in relation to cash flow and capital gains. While it may sound counterintuitive to invest in a property that loses money in the short term, negative gearing can be a strategic move for investors with a long-term outlook.
Negative gearing occurs when the expenses associated with an investment property (mortgage interest, rates, insurance, property management fees, maintenance, and other costs) exceed the rental income it generates. This means the investor is making an out-of-pocket loss each year.
For example, if a property’s total costs amount to $1,000 per week but the rental income is only $700 per week, the property is negatively geared by $300 per week, or approximately $15,000 per year.
The key reason investors consider negatively geared properties is the potential for long-term capital growth. While the property may cost money in the short term, its value may appreciate significantly over time, generating a net gain. This is where leverage comes into play—investors use borrowed money to purchase a high-value asset and retain all the capital growth, even if they only put in a fraction of the initial cost themselves.
For instance, if an $800,000 property increases in value by 5% per year, that’s a $40,000 gain. Even if the investor is covering a $15,000 annual shortfall, the net result is a significant financial gain.
Negative gearing is not suitable for everyone. It generally works best for:
While negative gearing can be a powerful strategy, there are risks involved:
When purchasing a negatively geared property, it’s crucial to invest in areas with strong long-term demand and population growth. Major cities like Auckland, Wellington, and Christchurch tend to be more resilient to market fluctuations due to their economic diversity and population growth.
Conversely, smaller towns with economies tied to a single industry (e.g., dairy farming or mining) may pose a higher risk if that industry declines.
Unlike in Australia, where negative gearing losses can be offset against personal income, New Zealand has “ring-fencing” rules. This means that investment property losses cannot be deducted from an investor’s personal income to reduce tax liabilities. Instead, losses can only be used to offset future rental profits.
Consider an investor who purchases a $750,000 property and rents it out for $680 per week ($35,000 per year). The annual costs are as follows:
Total costs: $52,790
Annual rental income: $35,000
Shortfall: $17,790 per year
If the property appreciates by 5% annually, it increases in value by $37,500 each year. The investor is covering a $17,790 shortfall but gaining $37,500 in capital growth—a trade-off that many investors are willing to make.
Given the risks, investors should plan for interest rate fluctuations and cash flow challenges. A prudent approach is to stress-test calculations using an 8% interest rate to ensure affordability even if rates rise.
If you’re considering a negatively geared investment property, Lighthouse Financial can help. Our mortgage specialists can guide you through the lending process, ensuring your investment is financially sustainable. Book a free consultation today and take the first step towards building long-term wealth.
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The information in this article is general information only, is provided free of charge and does not constitute professional advice. We try to keep the information up to date. However, to the fullest extent permitted by law, we disclaim all warranties, express or implied, in relation to this article – including (without limitation) warranties as to accuracy, completeness and fitness for any particular purpose. Please seek independent advice before acting on any information in this article.
