There’s a lot of debate on the merits of negative versus positive gearing. In fact, both camps can be extremely passionate about the issue! Supporters of each strategy purport that their way is the only way to invest and everyone else is wrong. However, nothing could be further from the truth. At the end of the day, they’re just terms given to different versions of the same thing. Here we share the difference between positive and negative gearing and what to consider when determining which is best for you.
What is a negatively geared property?
A property is negatively geared when the total cost of running the property is greater than the income that you receive from it. Proponents of this type of investing tend to focus on the tax benefits in that the losses are tax-deductible. If you can also claim depreciation, the total you get back in your tax return could cover the costs and even give you a net cash positive cash flow.
What is a positively geared property?
A property is positively geared when the total cost of running the property is less than the income that you receive from it. Accordingly, a positively geared property will provide a taxable income without the need to inject cash to keep it going. The income that you’re receiving may be taxable, however you may be able to offset some or all of this tax if you can depreciate the property.
Should you be gearing a property at all?
The idea of either passive income or long term tax deductions attracts many Australians to property investment. However investing into property should be part a wider financial strategy. You also need to consider if you should be borrowing large amounts of money to invest into property in the first place. You should make sure you have a long term strategy in place and that you’ve got your risks covered. Is your cash flow solid? Do you have sufficient funds to cover you if you lose your job or get sick and cannot pay the mortgage? Borrowing money to invest comes with risk so make sure that you’re doing it for the right reasons.
What is your objective for investing into property?
Are you after short term cash flow or are you after long term growth? While they are not mutually exclusive, you’ll generally find a property will meet one of these two objectives. Generally, buying in high growth metropolitan areas will give you growth but the cash flow isn’t as strong. This may result in negative gearing. The further you’re away from the city, the greater chance that you’ll find a property that gives you more cash flow. However, you’re likely to experience less growth due to slower population growth and higher supply.
Don’t focus on the terminology
The difference between positive and negative gearing could be as little as $1,000 per year. It’s therefore best not to get too wrapped up on the terminology. Instead, focus on getting the best possible property that you can afford for your financial capacity. The most important thing for any investment is to have a strategy and take an active approach to minimising the risks. Once you have done that, buy the best possible assets for your situation. Ignore the media hype and marketing terms and just focus on quality.