Gearing your property for positive results
If you’re thinking of investing in property you should consider whether you want a negatively or positively geared investment. Your personal circumstances and reasons for investing will help you determine what’s right for you but like many financial decisions there are also some general pros and cons to each option.
Positive and negative gearing explained
There are two ways you can make money through property investment, either from income returns or capital gain.
When your investment income is greater than your investment expenses you’ll have positive income returns – this is a positively geared investment.
Properties that return less rental income than the costs of owning the property are negatively geared. They’re expected to appreciate in value over time and are often called ‘capital growth properties’. This investment strategy relies on the property increasing in value over time to outweigh any short term financial losses.Pros to positively gearing your investment property
- Generally seen as a lower risk. As long as you keep the property tenanted the rental income will cover the investment costs, especially if your circumstances change.
- Access the income earned sooner and increase your borrowing potential for any additional loans you apply for.
- Use it to balance your investment portfolio, the additional income can pay the shortfall on any negatively geared investments.
- Usually only a short term strategy and might not make a big difference to your lifestyle or overall financial position.
- Income earned is taxable so put a small amount aside each month for tax time.
- Properties suitable for positive gearing are often in regional areas and might not return high rental income and/or have slower capital growth.
- Pros to negatively gearing your investment property
- Payoff only happens when you sell and if the property has increased in value.
- A long term approach and should form part of a broader wealth strategy, for example using the equity to purchase another property.
- Claim tax deductions on any expenses you incur and you’ll reduce your rental profit, thereby reducing your overall taxable income.
- You must be comfortable with putting your money in for little to no return for the long term.
- You need to budget for the short term and any changes to your circumstances, build some equity early on to cover for this.
- You’re relying on market conditions being in your favour when you come to sell.
Can you have the best of both worlds?
A positively geared investment usually won’t be a high capital growth property because of its location. To get the best of both worlds you should look at ways to increase your rental returns on your high growth properties, for example by renovating your property you can increase your rental income and your depreciation allowances.