Negative and Positively gearing properties – pro’s and con’s

Negative gearing refers to a property investment strategy where the cost of owning a property, including mortgage interest, maintenance, rates, and other expenses, exceeds the rental income it generates. As a result, the investor experiences a net loss on the property. This loss can be offset against other taxable income, reducing the investor’s overall tax liability. Though this strategy involves short-term losses, it is often pursued with the expectation that the property’s value will appreciate in the long term, potentially leading to capital gains.

Benefits of negative gearing: Tax deductions: The investor can deduct the losses from their investment property from their taxable income, reducing their tax liability. Capital appreciation: Investors hope that the property’s value will increase over time, leading to potential capital gains when they sell.Diversification: Negative gearing can be part of a diversified investment portfolio, balancing against other investments that may provide positive cash flow.  Potential long-term gains: Investors may benefit from both rental income and capital appreciation in the long run. Disadvantages of negative gearing: Ongoing cash flow requirement: Investors must have enough cash flow to cover the shortfall between expenses and rental income each year. Risk of capital loss: Property values can go down, leading to potential losses instead of capital gains. Limited tax benefits in the short term: Negative gearing relies on future capital gains for tax benefits, which may not materialize as expected. Constraints on building a portfolio: The need for additional cash flow can limit the investor’s ability to acquire more properties. What is positive gearing?

Positive gearing, also known as positive cash flow, is an investment strategy where the rental income from a property exceeds the expenses associated with owning and maintaining it. In this scenario, the investor generates a net profit from the property after accounting for all costs.

Benefits of positive gearing: Regular income: Positive gearing provides a steady stream of income from rental earnings, increasing the investor’s cash flow. Lower reliance on capital growth: Positive cash flow is not dependent on future capital appreciation, making it a more secure investment strategy in the short term. Potential to reinvest: The surplus income can be reinvested in other properties or used to pay down mortgage debt, helping to build a larger portfolio or reduce financial liabilities. Reduced financial risk: Positive cash flow properties are generally less sensitive to interest rate fluctuations, as the income covers the expenses. Disadvantages of positive gearing: Higher tax liability: The rental income generated by positive gearing is considered taxable income, potentially leading to higher tax payments. Limited tax deductions: Unlike negative gearing, there are fewer tax deductions available to offset the positive cash flow’s tax liability. Potential for lower capital appreciation: Positive cash flow properties may be located in areas with slower capital growth, potentially leading to lower long-term gains.

Choosing between negative gearing and positive gearing depends on an investor’s financial goals, risk tolerance, available cash flow, and market conditions. Each strategy has its advantages and disadvantages, and it is essential for investors to carefully assess their individual circumstances before making a decision.