What Is Negative and Positive Gearing in Property Investment?

Property investment is a popular avenue for building wealth and securing financial stability. As individuals explore this realm, they often come across the terms "negative gearing" and "positive gearing." These concepts play a crucial role in determining the suitability of a particular property and are essential for investors to understand.

At Property Club, we are passionate about educating our members, so they have the correct knowledge and resources to make informed decisions about investing in the Australian property market. Let’s take a look at negative and positive gearing and why they are crucial in making an informed property decision.

What are Negative and Positive Gearing?

Negative gearing and positive gearing refer to the cash flow of an investment property. Cash flow represents the difference between the rental income generated from the property and the expenses incurred to maintain it.

Negative gearing occurs when the rental income from the property is not sufficient to cover the total costs associated with owning it. These expenses include mortgage repayments, property management fees, maintenance, and insurance. As a result, the investor incurs a shortfall, which can be offset against your taxable income. This shortfall can reduce your overall tax liability, making negative gearing an attractive strategy for those looking to reduce their taxable income.

On the other hand, positive gearing takes place when the rental income exceeds the total expenses of the property. This results in a surplus of cash flow, providing the investor with additional income.

The Pros and Cons of Negative and Positive Gearing

Both negative and positive gearing have their advantages and disadvantages, which may vary depending on an investor's financial goals, risk appetite, and tax situation.

Negative gearing, while offering tax benefits, relies on the property value increasing over time. Investors purchasing in high growth areas may find this strategy appealing. Negative gearing relies on the investor to cover the shortfall until the market conditions changes so the property becomes cash flow positive. The amount of shortfall will vary on market conditions such as fluctuating interest rates and rent—such changes can turn the property from negatively geared to positively geared.

Positive gearing, on the other hand, provides immediate cash flow, reducing the need for additional funding from your pocket. This can be especially beneficial for investors seeking regular income or aiming to cover other financial commitments with the rental returns. Positive gearing can also increase the overall amount of tax payable, which may be less attractive for people looking for tax deductions.

Contact Property Club

Understanding negative gearing and positive gearing is crucial for any property investor. Each strategy has its own merits, and the choice between them depends on an individual's financial goals, risk tolerance, and prevailing market conditions.

Consulting with Property Club can help investors make informed decisions that align with their specific circumstances, ensuring a successful and rewarding property investment journey. If you have any questions about how negative or positive gearing could influence your investment decisions, contact us today.