If you’re planning to invest in real estate, you’ll need to determine which property investment strategy is the best fit for your personal goals, timeline, and resources. Positive and negative gearing are terms you’ve likely heard before, but you may be unsure of their meaning. In this blog we dive into what positive and negative gearing is and highlight the pros and cons of each.
Positive gearing simply means that the property in question is earning in excess of its running costs. If you add up all your expenses (interests, maintenance, insurance, rates, etc), and the rent you’re currently receiving for the property is a higher figure than what you’re spending, your property is positively geared. And easier way to think about it is that your property is earning an income.
The most obvious advantage of positive gearing is that you’ll be making a profit on your property right from the start. The extra income can be used to fund a deposit on another property or pay down the principle on your mortgage. With positive gearing you’re in a stronger position from day one!
Positive gearing sounds like the obvious choice, right? Well, some people choose to avoid this property investment strategy due to the increased tax burden generated by the receiving the extra income a positively geared property provides. This is what makes property investing such a personal journey and why it’s so important to ensure your strategy is the right fit for you.
Negative gearing, on the other hand, is when the cost of owning a property is higher than the income it generates. This may sound like a counterintuitive property investment strategy. However, people who negatively gear their properties often anticipate their property’s potential capital appreciation in the long term will offset the temporary losses. Additionally, you may be able to deduct the loss in earnings from your taxable income, although there may be tax implications (such as capital gains tax) that you’ll need to consider when you decide to sell the property.
Negative gearing generally carries a greater risk for investors, the shortfall in cashflow means that you’ll need to be able to carry the financial losses until tax time each year. If your life circumstances or interest rates change, what began as a minor financial burden can quickly become a major sore point. You certainly don’t want to be forced to sell your investment property before you’ve even had time for the capital to grow. Overall, negative gearing also makes it more difficult to grow your portfolio, as your extra cash will be stretched thin.
For these reasons, here at Simply Property we usually recommend that our clients opt for a property investment strategy on the acquisition of positive and neutrally geared properties. It’s a safer approach that tends to yield more consistent results over the long term for most investors. It also means that we can secure income tax benefits to offset property holding costs, providing our investors with a rental yield of 5%+.
Simply Property’s criteria is simple and effective; we target properties that have a minimum of 20 years depreciation remaining to ensure the additional tax benefits that will assist with cashflow. We also aim to minimise the risk associated with construction by purchasing properties that can generate an income from day one, in high growth areas. When you work with Simply Property, we work with you to develop a tailored strategy to suit your goals and needs. Our expertise and years of experience will be your greatest asset.
If you would like to start building your property portfolio or if you would like advice regarding your property investment strategy, feel free to contact us today by calling 07 5570 2579, or email us at contact@simplyproperty.au. Otherwise, visit our website to learn more about our business and the services we have to offer.
