February 13, 2019
Is investing in property on your radar this year? Property investment can be an excellent way to build your security and wealth for the future. Before you choose an investment though, it’s important to weigh up what the right investment strategy will be for you. A smart way to determine if a property is suited to your needs and your strategy is to understand whether it will be ‘positively geared’ or ‘negatively geared’.
While these terms can sound complicated, but they’re surprisingly straight-forward. ‘Gearing’ on its own simply means ‘borrowing to invest’, so if you take out a loan to purchase a property that you intend to rent out, your investment is said to be ‘geared’.
For a better understanding of the differences between ‘negative’ and ‘positive’ gearing we've done a little comparison of the two. Knowing the differences can help you decide what approach could suit your own investment strategy.
As always, our mortgage brokers in Broadbeach can sit down with you to help figure out what strategy is right for your circumstances, and we can even help you find the right properties to invest in.
What is ‘negative gearing’?
When the rental income received from an investment property is less than all the costs involved in owning that property, then this is negative gearing.
Negatively geared investments are also called ‘capital growth properties’, as they are typically expected to increase in value over time. Properties like these are attractive to investors because their increasing value is generally expected to outweigh any short-term financial losses.
These properties are typically found in close proximity to capital cities, and their value tends to perform better if you’re willing to keep them for at least a few years.
Advantages of ‘negative gearing’
Getting tax deductions – negative gearing is popular because it allows you to claim tax deductions related to the expenses you incur from your investment property. With the claimable tax deductions, you can reduce your rental short-fall and ultimately reduce your taxable income.
Less volatility - while properties in regional areas can often rely on employment from specific industries to drive up rental demand (like mining for example), negatively geared investment properties can be a less volatile since proximity to capital cities or major centres are generally always in demand.
Capital growth when you sell - if a negative gearing strategy goes as predicted, the capital returns from the sale of an investment property should end up being more than the borrowing levels and costs. This should create wealth for the investor when the property sells.
Often more affordable for tenants - it can be easier to secure tenants for the long-term, as the rent of these types of properties are typically more affordable.
Disadvantages of ‘negative gearing’
Budgeting is important – due to the shortfall of income, you’ll need to factor this into your everyday budget. Also, while profit is often expected when you sell a negatively geared property, you’ll also need to factor in the payment of capital gains tax. Our Broadbeach mortgage brokers can give you guidance to prepare for this.
There’s higher financial risk – you’ll need to be able to keep on top of your repayments and costs even if something in your life changes. Our Broadbeach investment experts know how you can protect yourself from these risks, and can help you put measures in place like income protection and personal insurances.
Prepare for a long-term strategy – negative gearing can be a longer-term wealth-creation strategy, so if your personal situation does change and you need to sell early, then you take a chance on the strategy not working out as well as you’d hoped.
What is ‘positive gearing’?
Positive gearing occurs when more is received from your rental income than what you’re paying in property maintenance, loan repayments, management fees and rates. This typically happens at times when rents are high due to good demand for properties and interest rates and repayments are low.
Positively geared properties can also be referred to as ‘cash flow properties’ because more funds are being received than you’re spending on your investment.
Benefits of ‘positive gearing’
Additional income – since you’re receiving income from your investment and aren’t out of pocket, there’s a clear benefit. Investors can even put this income towards additional payments on your home loan to pay it off faster.
Less risk – if circumstances happen to change, such as losing employment, then the income from your investment will cover its costs and it’s less likely that you’ll need to sell under pressure or within unfavourable market conditions.
It can make you more attractive to lenders – your additional income can be seen as a positive for any loan applications. This could increase your chances of being approved for any additional loans, which is a real benefit in the current policy climate.
Balancing your investment portfolio – experienced investors can use positively geared properties to balance their portfolio, tapping into their investment income to cover any shortfalls from other losses.
Drawbacks of ‘positive gearing’
Slower growth over the long-term – while this is not always the case, a positively geared investment is more likely to be located in areas that experience slower capital growth.
There’s often tax to pay – similar to other forms of income, the income earned on a positively geared property is taxable.
Can be more volatile – in some instances, where positively geared properties are dependent on a particular employment industry (such as in regional towns reliant on the mining industry), it can make the investment subject to more volatility.
We can help you decide if positive or negative gearing is right for you
Our Broadbeach mortgage broking team at Pacific Fair are experienced in assisting clients find the right investment strategies, finance and properties to invest in. We will search through hundreds of investment loan options and do all the legwork for you to save you effort, time and importantly to put the right strategy in place for you.
Contact Mortgage Choice at Pacific Fair on 07 5676 6433 or click ‘Book an appointment’ on our Homepage for a free, no-obligation appointment.
