Property Investment Tips: Do you get what gearing is about?

By the resi financial blog team, 23 June 2014

What is positive or negative gearing?

Investing in property is commonplace in Australia, but that doesn't mean it's for everyone. 

You need to take a diligent approach to ensure your investment pays off, from securing the best fixed interest rate to thoroughly researching areas that you could buy in. It's not just a matter of deciding which suburb to buy in - you'll also need to consider whether a family home, compact townhouse or apartment is the right investment dwelling for your property goals.

Let's say you've found a property that looks to deliver a strong capital gain in five, 10 or 15 years time. However, you're unsure about whether the median price for weekly rent in the area is going to cover the costs of your loan repayments.

Alternatively, you might have found a house or apartment that's situated in an area with a relatively high rental yield, suggesting you will make good on your loan repayments, provided you consistently have tenants in the property.

If thoughts similar to the above have gone through your head, you've already considered gearing. 

When you borrow to invest, this is calling gearing. If your rental expenses outweigh rental income, then the property is negatively geared - and you'll have to make up the difference yourself to ensure your fixed or variable rate mortgage payments don't fall behind. However, if the rental income exceeds the costs associated with the property, then your investment is positively geared.

Positive gearing is favoured by investors who want the security of a cash-flow positive property. If your personal circumstances changed, you might not be in as difficult a financial situation if the property was negatively geared. However, it's important to bear in mind that you will be taxed on the additional income.

Negative gearing requires you to plan exceptionally carefully, as you'll have to make up the shortfall between rental income and expenses out of your own pocket. However, there are tax benefits. Furthermore, if you make a healthy capital gain on the property when you sell it, this could make such an approach favourable.

Categories: Property Investment