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What is the difference between negative and positive gearing? | Mortgage Choice in Joondalup

December 11, 2023 by Shae Aiello

 
It's no mystery why we as Australians love property investment - it's a great way to get our money working harder for us, rather than just letting it sit in a bank account earning minimal interest. But when investing, one of the most important things is to get your investment strategy right - from your very first investment.
Your investment strategy will be built based on what your goals are: do you want a property that earns you money right off the bat, as a way to top up your income? Or would you prefer your property to gain value over time, and reap some of the tax benefits? This comes down to what's known as gearing.
 
Gearing is simply a way to describe borrowing to invest. If you borrow money to purchase a rental property, your investment is said to be geared. Whether you prefer that investment to be positively or negatively geared is where your strategy comes in. Let's look at the difference between the two:
 

Having a negatively geared investment

As we know, purchasing and maintaining an investment property in Australia means a lot more than just forking out the deposit on the purchase price. You have to cover insurance, repairs, maintenance, property management and the interest on your loan. This can often mean that the annual rental interest that you earn is less than the amount you are paying to maintain both the property and the loan. 
 
When the costs of your investment are more than what you earn from it, your investment is said to be negatively geared. However, this doesn't always have to be a bad thing. In Australia, the Government allows investors to deduct any losses they make on an investment property from their taxable income.
 
This can make the prospect of having a negatively geared property a lot more attractive to potential investors.
This strategy also suits investors who are looking to make money out of the property through long-term capital growth. This means that an investor may purchase a property with the hope that when they hope to sell it, it will be worth more than when they bought it. With our strong property market in Australia - this can often mean a healthy profit if you're willing to hold onto the property for long enough.
 

Having a property that is positively geared

Then there are properties that generate enough annual rental income to outweigh the costs of owning and maintaining the property. If this is the case, the property is said to be positively geared. A property that is positively geared can be a great way for the landlord and owner to top up their income - while also perhaps earning some long term capital growth for the future sale of the property. 
 
However, unlike having a negatively geared property you won't receive any tax benefits. In fact, due to your increased income, you will have to make sure you have money put aside to cover the tax applicable to this new income.
 

There’s no single option that is best for everyone

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