Positive vs Negative Gearing: Which Investment Strategy is Best?

When it comes to investment property you are bound to be asked if you want to employ a positive or negative gearing investment strategy. Say what? Isn’t it just a matter of having some extra funds and buying a property with the ultimate goal of making you money? Yes…and no.

Of course, the objective of any investment is to grow your wealth in the long term but there are different ways this can be achieved through property investment. Enter positive versus negative gearing. Each strategy works differently with varying pros and cons, neither one being better than the other. However, one will certainly be more suited to your situation and investment goals. So let’s take a look at them.

Investment properties that earn more in rental income than you pay in mortgage repayments and other expenses are positively geared. This strategy is often employed when rental income is high, rental properties are in demand and interest rates are low. In a nutshell, the tenant is putting extra money into your pocket. Winning!

So what’s good about using a positive gearing investment strategy? Increased income – the property is generating extra income and you’re not left out of pocket. Lower risk – any change in your own circumstances can be alleviated by the extra income being generated by the investment property. Lender attractiveness – the extra money going into your pocket can make you more attractive to lenders for additional loans.

Positive gearing has a few cons too. Any income generated by the investment property is taxable so you’ll be paying more in tax. Quite often, positively geared properties are located in regional areas which see slower longer-term capital growth so don’t count on a quick return on investment. Furthermore, positively geared properties may be reliant on specific industries (think mining towns) which may have a degree of volatility associated with them.

Now let’s think about negative gearing – this type of investment property strategy is where the property generates less rental income than it costs to own the property. Basically, it leaves you out of pocket.

So why would you negatively gear an investment property? Firstly, these properties can reduce your taxable income by allowing you to claim tax deductions on expenses associated with owning the property. Any opportunity to give the tax-man less money has got to be good right? The opportunity for capital growth over the longer-term is greater as such properties are often located in cities that are not associated with volatile industries or employment downturns. And because of the affordability of such properties, it is easier to secure longer-term tenants and ongoing rental income.

The cons with negative gearing must also be considered. It takes strict budgeting to manage the short-fall and of course, the tax-man will collect on the capital gains when you sell. Negative gearing is also a longer term wealth creation strategy so if your circumstances change and you need to sell sooner than anticipated, the sums may not work out in your favour. 

Sound confusing? Working out which is the best strategy doesn’t have to cause undue stress. Look at the properties available on the market, consider their location and work out what you can realistically afford. Do you want a higher risk quick return on investment or are you in a position to create wealth over the less risky, longer term?

We can help determine your property investment goals and work out the best property strategy for you. Either way, you will need to pay the tax-man his dues but you do have some control over when to shell out so please give us a call!

Links:

https://www.moneysmart.gov.au/investing/invest-smarter/negative-and-positive-gearing

https://www.ato.gov.au/general/property/residential-rental-properties/expenses-you-can-claim/?anchor=Negative_gearing#Negative_gearing

 Disclaimer:  Any statements or comments made are general in nature and are neither given nor to be taken as financial advice.

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