Positive Vs Negative Gearing

To positively gear or to negatively gear: that is the question (asked by landlords… not the title character of Shakespeare’s Hamlet!)

Every landlord may ask themselves this question. The answer depends on several different factors, like your long-term and short-term goals and your financial situation.

So, in this post, the property experts at Patrick Leo explain the differences and benefits of positive vs negative gearing.

What is positive gearing?

Let’s say you’ve got a property that generates more income than the cost of expenses you pay on the property. This is positive gearing, also known as a positive cash flow. This means your property is generating a profit, leaving you with some cash left over each month once expenses are paid to put in your pocket.

Benefits of positive gearing

The primary benefit of positive gearing is a positive cash flow – that is, that your property is generating a profit. It always feels good to see that extra cash coming into your account, giving you a sense that your property investment is paying off. This extra income can be saved for another deposit, or reserved for other investments like stocks or bonds.

It also has the benefit of an improved income position in the eyes of banks, meaning you’ll be eligible for a higher loan amount without having a high salary from your job.

Disadvantages of positive gearing

With higher income comes (you guessed it) higher taxes. For many property investors, a higher income tax is highly undesirable, particularly if they earn a high salary or already have a considerable property portfolio.

What is negative gearing?

So, then we come to negative gearing. This is when the cost of expenses actually outweighs the income generating by the property, causing a loss. This loss can appear risky, but there are benefits to be reaped from this strategy.

Benefits of negative gearing

With negative gearing, you can deduct some of your costs from your taxable income while benefiting from capital appreciation. In other words, you’re reducing your tax while your property goes up in value! For some investors, this is a highly desirable strategy, as the positive cash flow isn’t required.

Disadvantages of negative gearing

With this strategy, there are additional risks. If an investor finds themselves without a job suddenly, then their negatively-geared property may become too much of a financial burden.

Still tossing up which financial strategy is best for your property? Get in touch with the property experts at Patrick Leo. Specialising in buying property, managing property and creating winning property strategies, the team at Patrick Leo have a passion for making Australians wealthier, happier and smarter. Our leading team of property advisers are committed to helping you on your path to abundant wealth, having helped hundreds of clients achieve the same. Get in touch with our team and get started today.