Property Investment Tips: Are you negative or positive gearing?

By the resi financial blog team, 23 March 2015

Property Investment Tips: Are you negative or positive gearing?

Property investment is rife with jargon, but some terms are more important than others. Gearing is just one of those terms. In terms of property, it's used to describe borrowing to buy an asset - for example, you are gearing when taking out a mortgage to fund a rental. There are ups and downs to both positive and negative gearing, but here are some top things to keep in mind when deciding on your particular strategy.

Negative points

Basically, your investment is negatively gearing when the cost of owning the property - generally mortgage repayments - outstrip the amount of rental income it creates for you every year. This means the property will make a loss, which you could use for tax purposes. It can be positioned against some other income, like your salary or monthly wage, to generate tax savings. 

While it might seem strange to purchase a property at a loss, most people choose a negatively geared property for the possibility of capital growth. You can make a profit if you finally pay of the loan and the rental income finally surpasses what you were paying in interest, or when it comes time to sell - but remember there are lots of other costs associated with owning a rental. This is something you should get advice on to check whether it will suit your financial situation. 

Positive thinking

On the flip side, a positively geared property is one where the income it generates is higher than the amount you need to pay on the mortgage, as well as other costs. This might not offer quite as much potential for capital gains and unlike negative gearing, the difference between costs and income can be taxed, so you'll need to factor this in to your budget. 

Whether negative or positive gearing is the right investment strategy depends on what you want to get out of the investment. Some people are quite happy to gather the passive income generated from the difference between rental income and expenses, while others might want to sit tight for capital gains and tax benefits.

Whatever your investment goals, it's worth talking to a loan specialist at resi for a selection of property finance options to suit your financial situation.  

Categories: Property Investment