Why negative gearing is a positive for a first home as an investment

Thinking about buying your first home because you've saved for that big deposit? Or are you contemplating instead becoming a first home investor because of the current advantages of negative gearing?

Thanks to negative gearing, buying an investment property may present a better financial proposition than buying a home to live in, particularly if you and/or your partner pay income tax at a relatively high marginal rate. 

Negative gearing involves claiming a tax deduction against your taxable income from all sources for the interest and other expenses which exceed the income from a rental real estate investment.

Owner-occupiers, which includes first-home buyers, get no such incentive.

Thus for an investment property, a rule of thumb is to consider it as a business, meaning any costs running the property can be deducted from your taxable income.

Many young, and not so young, Australians are now taking to what's been dubbed rent-vesting, a trend where buyers – typically Gen Y, purchase their first property for investment purposes rather than living in it.

According to Mortgage Choice research, around 37 percent of property investors are first home buyers, compared to just 21 percent in 2014. 

Estate agent John McGrath noted the logic: buy in affordable suburban areas, while you perhaps stay at home saving or rent in inner city locations that are out of reach but offer a better lifestyle.

It is the case in many markets of Sydney where the rent on a newly acquired investment property will not cover repayments and other costs in their entirety, so an investor will have negatively gearing, and that means tax savings.

So, what are other issues to consider? Certainly the future of negative gearing will be a big federal election issue, so pay close attention on the debate on possible changes to the scheme.

Property investment needs a long-term approach, and the real benefit will likely come from the capital growth, rather than negative gearing, but strong price growth can't be taken for granted especially after the past three years.

Beware that the lenders will be closely tabulating all your actual expenditure and income assumptions in your loan applications, so its best to check for feedback before you sign up on any property purchase.

Unless you are staying rent free or subsidised at home, much of the outcome depends upon the rent you have to pay because, as with any owner-occupied house mortgage, this is paid from after-tax income.

The higher the rent you pay, the less capacity you will have to service the cost of a negatively geared investment home, even after allowing for the tax benefit from a negative gearing loss.

No two lenders will lend you the same amount, so shop around.

And when you do sound out the emerging no go postcodes that lenders are shying away from lending.