Positive versus negative gearing: Understanding investment terms

By the resi financial blog team, 06 January 2014

Positive and negative gearing

If your New Year's Resolution is to look into becoming a property investor, the first thing you'll need to do is get in contact with a financial expert to discuss the various investment loans available to help make these dreams comes true.

However, there are a vast range of different things to investigate in order to make the most out of your property portfolio. For example, two of the terms used regularly in discussions of investment property are positive and negative gearing.

Wrapping your head around these two concepts can help you to maximise the returns you secure from your properties, while aiding future growth of your portfolio.

Positive Gearing

Properties that have a higher income than the outgoing expenses required to maintain them are referred to as positively geared. When the property has a positive cashflow - that is, it doesn't lose money over the year - the income earned is enough to cover any costs incurred.

These properties tend to be held for shorter periods of time and have a faster financial turnaround. The downside to this is the tendency to experience less overall capital growth, meaning that the majority of income comes from rental yields rather than growing value.

Negative Gearing

In the case of negatively geared properties, the income earned from the real estate is less than enough to cover the overall expenses. This means the investor often has to pay these out of their own pocket in order to make up the difference.

While this may seem like a losing strategy in the short term, the benefit of purchasing negatively geared property is the often substantial capital gains experienced.

Holding these properties long enough to secure a fantastic growth in capital means that when the property is finally sold for a profit, the investor earns back all the money they spent during their ownership - along with a healthy profit.

Categories: Home Loans, Property Investment