The other day, I had an investor who is a Singaporean. He has invested in Australian properties and held on to them for the last ten years. Both properties – one in Sydney and the other in Melbourne have more than doubled in value. Both properties are positively geared. He asked me, ‘KS, what do you think about negative gearing?’

Negative gearing is a strategy used by tax paying residents in Australia. Essentially, it involves making a ‘loss’ in the property and getting a tax refund from the taxman. The end result might result in ‘positive cash flow’ after the tax refund from the taxman. However, most properties will require an ‘actual cost’ which is minimal per week (e.g.$50/week) depending on the type of properties the investor acquire. So why would an investor buy a property and make a loss every week?

Simple, the investor lowers his tax bracket if he is advised properly and pays less tax. On top of that, there is potential capital growth and investors can build up a property portfolio leveraging on borrowed funds.

I personally believe unless you are tax resident in Australia, you should not embrace negative gearing. As international or offshore investors, we have the privilege of borrowing in an alternative currency that is ‘cheaper’. E.g. Singapore investor can borrow in SGD, and Japanese can borrow in JPY. The lower interest rate can be an attractive option for investors. There are also strategies to mitigate currency risks.

My reasons are simple: If your properties are structured properly, they will be self-sustaining, and you will lessen the risks of holding costs. When that happens, you will find yourself building a portfolio faster and more efficiently. The whole game of property acquisition and portfolio development is a function of time. When time is on your side, it’s easier to accumulate wealth. If properties double every 7-10 years in Australia as what’s commonly said, how fast should you acquire and how much?

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