As a means of diversifying your exposure to different asset classes, property can be less volatile than shares (although not always) and tends to be the haven investors rush to when other assets suffer. While it has lost its gloss since the boom times of the late 1980s, sensible investments in property have many attractions.

Your first investment in property doesn’t always have to be something you live in. Indeed, buying a small apartment to rent out can be a good way to accumulate a big enough nest egg so you can eventually buy your own place.

Generally, investing in real estate gives you access to two benefits: 1) capital growth and 2) the tax advantages associated with negative gearing.

What is capital growth?

Capital growth is the money you make as the value of your property appreciates. The larger cities – especially Sydney and Melbourne – have enjoyed occasional boom periods that have seen many home owners with properties that have sometimes doubled in value during these times. While there’s no guarantee your property will gain in value, historically property has experienced steady growth. The South East Queensland belt is popular due to strong positive population growth and more southerners and New Zealanders enjoying a sea change here.

What is 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.

Tenants for rent

Investment properties are generally rented out unless you’re in the enviable position of not needing the rental income so when calculating what you can afford to buy, you will need to factor in contingencies for the property being empty for short periods, whether for repairs or for finding new tenants.

Rental income helps generate the cash flow to pay the mortgage but don’t forget to include this income when you file your tax return as this money will count towards your total income for the year.

From an accounting point of view, no negative gearing means lower tax advantages. But that doesn’t necessarily mean you should rush out and sell it. Yes, you’ll have to pay more tax because the income you’re making is more than your losses but the fact is you are making money – which is why you invested in the first place.

Seek advice from a tax agent or financial planner before leaping to sell a positively-geared property investment. The temptation is to reap your profits and plough them into another property – and this is a perfectly reasonable strategy – but don’t lose track of the costs involved in doing that. Stamp duty alone can be a prohibitive disincentive

They can also deal with the time consuming tasks of vetting potential tenants and checking their credit worthiness. As they deal with tenants and rentals every day, property managers have up-to-date information on what the market is like and what tenants are prepared to pay. They may also have access to tenants who they can recommend for your property. And don’t forget their fees are tax deductible.

So if you can reliably estimate your income and expenses for this year, you can have less tax deducted from your pay now in lieu of getting a refund at the end of the financial year. It’s not quite the same as getting a cheque for next year’s refund now but it’s close.

For example, if you have an annual gross income from your employer of $45,000, but estimate you’ll make a $15,000 loss on an investment property, you can apply to have your tax payments calculated on an income of $30,000. That could cut your weekly tax payments by about $85. We can show you how to use this system to assist in reducing your loans quickly.

Contact the Australian Tax Office for further information on Pay-As-You-Go (PAYG) withholding payments