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If you want to buy an investment property in Australia, your two broad options on your investment return are negative and positive gearing.
According to a recent survey of property investors, about 38% say their property investment or portfolio is positively geared. We started wondering why this number is so low, considering positive gearing offers some very attractive benefits.
Read on to find out everything you need to know about both negative and positive gearing, including answers to FAQs.
If all your investment property’s expenses exceed the rental income that it generates, then your property is said to be ‘negatively geared’.
Although on the surface negative gearing may appear to be a counter-intuitive investment strategy, the shortfall of the property’s income over its expenses in the shorter term may be offset by its increase in value over time.
Both negative and positive gearing strategies can help you to pay less tax. That’s because investment property expenses are tax-deductible against your income. Examples of tax-deductible investment property expenses include:
From a ‘paying less tax’ perspective, a negative gearing strategy will save you the most if you are in a higher marginal tax bracket (e.g. earning over $120,000 or over $180,000), though it can still be worthwhile if you earn less than those amounts.
However, simply saving tax shouldn’t be your primary reason to negatively gear an investment property, as you will need an income source to offset the shortfall between your property’s expenses and income. You won’t need to do that if your property is positively geared.
Positive gearing is simply the opposite to negative gearing. This is where an investment property’s rental income exceeds all of its tax-deductible expenses. This is also known as ‘cashflow positive investing’ and is highly attractive to people looking to generate a new, passive income stream.
Your investment will be cash-flow positive, which can be an important consideration. You won’t have to rely on other income sources to ‘prop up’ the shortfall between your property income and expenses (like you do with a negatively geared property).
Although you may pay more tax with a positive gearing strategy than you will with a negative gearing one, it can be a better option for those in lower marginal tax brackets whose tax bills won’t be as high.
Your positively geared property is also likely to increase in value over time just like a negatively geared property can. History shows that quality properties in good locations in Australia have achieved long-term price growth, even if there are short-term periods where prices may stagnate or even fall slightly.
Negative gearing is often the fastest strategy to use to start building an investment property portfolio. Once you have built up sufficient equity in your home or investment property, you can then use that equity to help you finance one or more additional investment properties.
Many investment properties start out being negatively geared and become positively geared overtime as more of the property’s loan is paid off and interest costs subsequently decrease.
Positive gearing or ‘cashflow positive investing’ is highly attractive to people looking to generate a new, passive income stream.
There is no right or wrong answer to this question. It depends on your individual financial situation, needs and goals, and each of those can change over time.
Whether you’re pursuing a negative or positive gearing strategy, property is best viewed as a long-term investment in order to generate the best possible returns. The key to maximising your investment property return is to choose a quality property in a good location. Doing that will ensure there is always high tenant demand (to maximise your income) and strong future buyer demand (to maximise your capital growth prospects).
Whether you want to pursue a negative or positive gearing approach with your investment, we believe in getting a strategy before you invest. Our team at DPN can help you every step of the way, with a personalised plan which models out the cash flow opportunities to help identify the best investment strategy for you.
Our complete, end-to-end service includes helping you to choose a suitable property in a high demand location, backed by leading independent research. We provide access to high quality, multi-rental house & land packages, a specialist and accredited mortgage broking team to secure finance, plus a premium, concierge service across the build of your property and ongoing property management.
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