Positively Geared vs Negatively Geared Property

Thursday, September 17, 2015 / Property Finance, Property Investment

The terms positive and negative geared property are used frequently in property investment but what do they really mean and how do they impact you as the investor?

Positively Geared Property:

Positive gearing occurs when the rent you’re receiving from your tenants is more than what you are paying to hold the property including costs such as mortgage repayments, insurances, property maintenance and council rates.  This tends to occur in locations where rental yields are strong and interest rates are low.  It can also occur on investments that have been held for a number of years where the interest rate has remained fixed but the rents have increased.

The term positive certainly sounds like it the better option of the two but lets explore what the pros and cons of this type of investment are.

Pros:

  • Property is cash flow positive and therefore you have extra income in your pocket.
  • You can utilise the profits to help you pay down other debts such as the house you live in.
  • There is less financial risk involved if your circumstances change.  For example if you were to lose your income then your property is self sufficient and you don’t have to find additional money to hold it.
  • Banks can look more favourably upon this sort of investment.

Cons:

  • Often positively geared properties are in low growth areas.  If your ultimate goal is growth from your portfolio then this doesn’t suit.
  • If you’re looking to save on tax by investing in property then positively geared property isn’t the way to go.  As these investments are actually making you profit you’ll be taxed on these profits.
  • Positively geared property can often be reliant on external factors such as mining or industry to keep rents high.  If these variables change so too can the rental market.

Negatively Geared Property:

An investment property is negatively geared when the rent you’re receiving isn’t covering all of the costs associated with holding it including the mortgage repayments, insurances, maintenance and council rates.

Now lets explore the pros and cons of negative gearing and how these properties best fit into a property investment portfolio.

Pros:

  • Investors are willing to pay a little extra to hold a negatively geared property as the expected growth will eventually outweigh these costs.  Negatively geared property is often found in high growth areas where the ultimate goal is to make money when you sell the property.
  • Having a negatively geared property means you are entitled to tax deductions.  Basically your taxable income is reduced and your tax return is increased, putting money back into your pocket. This assists in reducing your rental shortfall and ultimately the properties weekly holding costs.
  • These types of properties are generally less dependent on external factors such as mining which in turn makes them less volatile.

Cons:

  • These investment properties will cost you money out of your pocket to hold at least for the first few years.
  • It may be harder to get a bank loan because the property is costing you money not generating cash flow at the beginning.
  • Typically you will need a long terms strategy when purchasing a negatively geared property in order to reap the capital growth benefits.  If your circumstances such as income change you still have a property that requires cashflow to hold.

Having a clear understanding of what you want to achieve from property investment is critical as you can then make an educated decision on what type of property to purchase.  Ultimately it’s about choosing what suits your investment strategy and what will help you achieve the goals you’ve identified.

If you would like to discuss your personal investment strategy or want help finding the right type of property please feel free to contact us for more information.

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