Real Estate

Positive and negative gearing: how they help property goals

Positive and negative gearing: how they help property goals

The key concepts of positive and negative gearing can be a huge help to home owners, allowing you to focus on favourite sports while ensuring your property's score won't be tied into knots when you return to it.

Let's kick off, shall we?

What is gearing?

'Gearing' in real estate terms simply means the act of borrowing money to buy an investment property.

What is positive gearing?

Positive gearing is when your investment property makes you money - in the short term.

In other words, your home ownership costs - such as body corp fees, maintenance and mortgage repayments - are offset by your rental income.

Low interest rates; charging your tenants higher rental rates, or simply buying in a popular hotspot area can help you enjoy a positive cash flow as well.

And we're talking a steady, reliable cash flow as well or essentially, a passive, behind-the-scenes income wherein tough, 10-hour work days may even become a thing of the past.

Positive gearing: benefits 

As a general rule of thumb, positive gearing works best in times, or areas, when there is a demand for rental properties as investors can bump up rental prices - which will, in turn, help their own income to grow.

As well, the extra income from positive gearing can assist such property owners to purchase other properties sooner rather than later, or simply have extra money put aside.

Positive gearing: disadvantages

At the same time, positively geared properties need to be well maintained to ensure the higher rent is worth it for tenants while that extra income - while very handy - could well see investors paying extra tax.

Investors will also need to make sure they both buy and sell such properties at the "right" time to ensure they continue to enjoy positive gearing from it.

What is negative gearing?

Negative gearing is when an investment property fails to do its job of making money for its owner.

In other words, the property's expenses far outweigh the owner's investment income.

In this case, investors will have to top up their negative property investment income in another way - or downgrade their investment costs, neither of which is particularly easy.

Yet for all this - and strange as it may sound to first-time property investors - there are plenty of reasons to choose a negatively geared property.

Negative gearing: benefits 

It's very important to note that negative gearing may only be negative in the short term.

Indeed, negatively geared properties can be of great financial benefit - in the long-term - to their owners.

Why?

Any short-term financial losses - and be prepared for a few if you decided to head towards a negatively geared purchase - may be offset by significant long-term benefits.

Investors may gain such benefits simply by holding onto their investment property for a significant period of time, and throughout property market ups and downs. 

In this way, investors are allowing their property to do what properties do best: make money for their owners, particularly over the long term.

As well, investors may well be able to claim any rental losses as a tax deduction - and for those already paying a lot of tax, this can be a big help 

Indeed, this is the main reason people actively pursue negatively geared real estate opportunities.

Negative gearing: disadvantages

Negatively geared properties aren't financially brilliant in the short term.

This lack of income can be heightened by such issues as being unable to find a tenant; an emergency maintenance issue; or just basic market ups and downs.

In other words, negatively geared properties can be financially riskier than positively geared ones and will need investors to be tax, property, and research savvy.

Positive Gearing
If you're a first-time property investor, it's probably best to stick with positive gearing - but you will still need a good knowledge of the property market.

Which gearing strategy is best?

This depends entirely on you!

Those with a strong knowledge of the property market, who are already paying high taxes and are prepared to take the risk and wait for long-term capital growth may well pursue a negatively geared property.

If you're a first-time property investor, it's probably best to stick with a positively geared property option - but you will still need a good knowledge of the property market.

Either way, property investors should have one ultimate goal: profit.

Whether they plan to hold onto their property for a short-term or long-term period, profit is what property investment - and essentially, every property purchase - is always all about.

We're here to help

Whatever home loan road you wish to take, we’d love to help you travel it!

We can find you the best home loans from more than 40 of Australia’s biggest banks and specialist lenders and we can also help you refinance your loan to help you keep more money in your pocket.

So, give us a call today at Lending Loop.

You might be interested in

Rental yields explained

Rental yields explained