Investment Property Gearing: The Ups and Downs
Investing in property can be a lucrative opportunity for those looking to grow their wealth and secure their financial future.
However, it's important to understand the different strategies involved in property investment, such as negative gearing and positive gearing, to make informed decisions and maximise returns. Negative and positive gearing are two investment strategies used by property investors to help them manage their cash flow.
In this article, we will explain what negative and positive gearing are, how they work, and the key factors to consider when deciding which strategy is right for you.
Whether you're a seasoned property investor or just starting out, this article will provide valuable insights into the world of property investment and help you make informed decisions to achieve your financial goals.
The Difference Between Negative vs. Positive Gearing
Negative Gearing
Negative gearing refers to a situation where the expenses associated with an investment property, such as mortgage payments, property management fees, and maintenance costs, exceed the rental income it generates. The result is a net loss on the investment, which can be offset against other taxable income to reduce the investor's overall tax bill.
Negative gearing is a popular strategy among property investors, particularly in markets where rental demand is high and property values are appreciating. In this scenario, investors can afford to carry the short-term costs of negative gearing in the hopes of realising long-term capital gains when they sell the property.
The main benefit of negative gearing is that it can provide investors with tax breaks, as the interest payments on the loan are tax deductible. This can help reduce the investor’s tax burden and increase their overall return on investment.
However, there are also risks associated with negative gearing, as the property may not appreciate in value as expected, or the investor may not be able to cover the loan payments if the rental income is not sufficient.
Positive Gearing
Positive Gearing occurs when the rental income from an investment property exceeds its associated expenses, generating a net profit. This means that the investor is earning a positive cash flow from the investment property, which can be used to cover the costs of ownership or reinvested for future growth.
Positive gearing can be risky if circumstances change and the rental income is no longer sufficient to cover your costs.
Factors to Consider
When deciding between negative and positive gearing, it's important to consider a number of factors, including your financial goals, risk tolerance, market conditions, and your personal circumstances. It's also essential to seek professional advice from a qualified financial advisor to understand the tax implications of each strategy and to make an informed decision. It is important to remember that gearing is a long-term strategy and that investors should not expect to make a profit overnight.
Both of these options are both viable strategies for property investment, but each has its own advantages and disadvantages. It's up to the individual investor to assess their personal circumstances and make a decision that aligns with their financial goals and risk tolerance.
If you would like to discuss your investment, the team at MIX have specialist residential and commercial consultants to help you realise your goals.
Our team understands that your real estate journey is unique, which is why our approach is highly personalised and transparent. Get in touch with our team today.
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