Is positive or negative gearing the best strategy?
There’s a lot of debate on the merits of negative versus positive gearing. In fact, both camps can be extremely passionate about the issue with supporters purporting that their way (either positive or negative) is the only way you should be investing and those that don’t are doing it wrong.
Nothing could be further from the truth. At the end of the day, they’re just names given to different versions of the same thing. To help you understand the differences and determine which strategy is right for you, here’s what you should consider.
What is a negatively geared property?
A property is negatively geared when the total cost of running the property is greater than the income that you receive from it. Proponents of this type of investing tend to focus on the tax benefits in that the losses are tax deductible. If you can also claim depreciation, the total you get back in your tax return can cover the costs and even give you a net cash positive cash flow.
What is a positively geared property?
A property is positively geared when the total cost of running the property is less than the income that you receive from it. Accordingly, a positively geared property will provide you with a taxable income without the need to inject cash to keep it going. The income that you’re receiving may be taxable, however you may be able to offset some or all of this tax if you can depreciate the property.
Should you be gearing into property at all?
While the idea of either passive income or long term tax deductions can be sufficiently compelling to make people go down this path, you need to consider if you should be borrowing extensive amounts of money to invest into property in the first place. You should make sure you have a long term strategy in place and that you’ve got your risks covered. Is your cash flow solid? Do you have sufficient funds to cover you if you lose your job or get sick and cannot pay the mortgage? Borrowing money to invest comes with risk so make sure that you’re doing it for the right reasons.
What is your objective by investing into property?
Are you after short term cash flow or are you after long term growth? While they are not mutually exclusive, you’ll generally find that buying in high growth metropolitan areas will give you growth but the cash flow isn’t as strong. This may result in negative gearing. The further you’re away from the city, the greater chance that you’ll find a property that gives you more cash flow. However, you’re likely to experience less growth due to slower population growth and greater the availability of land and property supply.
Don’t focus on the terminology
The difference between a negatively and positively geared properties could be as little as $1,000 per year. It’s best not to focus on the terminology, but instead focus on getting the best possible property that you can afford for your financial capacity. The most important thing for any investment is to have a strategy and take an active approach to minimising the risks. Once you have done that, buy the best possible assets you can that suit your situation. Ignore the hype and marketing terms, just focus on quality.