Property gearing: Understanding how to make your investment work for you
If you're considering taking up property investment in the future, there are a number of terms you will come across during your initial research, and even as you begin to build your portfolio.
However, two of the most common have to do with a concept called gearing.
Purchasing investment property has the ultimate end goal of earning an income of some sort from the real estate.
When the property you've purchased has a higher income than weekly expenses, that real estate can be considered a cashflow property – or positively geared. This means that the income is enough to cover the expenses, while also affording you with consistent money in your pocket.
Often, these properties are held for shorter periods of time, in order to make a quick turnaround on your original investment. These properties tend not to experience capital gains growth, meaning they won't dramatically increase in value over time.
Negative gearing is the exact opposite of positive gearing, where the expenses of an investment property outweigh the weekly income. The expenses then have to come out of the investor's own pocket, making this expensive in the short term.
One of the main benefits of this type of investment is the growth of capital gains. These properties are often located in real estate hotspots, and are held for extended periods of time in order to undergo decent capital growth.
At the end of this period, when the investor decides to sell the property on, the goal is to earn back all the money spent over the years on expenses, while also making a healthy profit.