Negative Gearing vs Positive Gearing | Pros & Cons 

When it comes to property investment in Australia, the issue of negative gearing vs positive gearing is probably the one that will be talked about more than any other issue. Although both types of gearing are indeed widely used, each has a purpose depending on your income, risk profile and goals. In order to create a more sustainable property portfolio, you must understand both. This blog will help you make an informed decision on whether positive gearing suits you better or negative gearing suits you better.

What is Gearing in Property Investment?

Gearing refers to borrowing money to invest in an income producing asset such as a rental property. The term describes whether the rental income covers the costs of owning that property. 

In the debate around negative gearing vs positive gearing, the key distinction lies in cash flow. One strategy may cost you money in the short term, while the other generates immediate income. 

What is Negative Gearing?

Negative gearing is when the income generated from the property is less than the cost of holding the property. This cost may include loan repayment, maintenance and property renovation, insurance, property management, and depreciation.

In this scenario, the individual who is investing will make a loss, and this will be tax deductible. The amounts that can be deducted include the interest on the loan, rates payable to the local council, insurance, property management fees, repairs and maintenance of the property, as well as any depreciation amount. 

The cost incurred on the property, such as stamp duty on the purchase of the property, fees for conveyancers, and the buyer’s agent, is not deductible. It is part of the cost base for capital gains tax purposes. This is why negative gearing is usually employed by an individual who has a higher income and can withstand a loss for long term gains.

Pros and Cons of Negative Gearing

Pros

• Investment losses may be used to offset taxable income
• Allows access to high growth areas with lower rental yields
• Potential for strong long term capital appreciation

Cons

• Ongoing out of pocket expenses
• Reliance on property value growth to justify losses
• Increased exposure to interest rate rises

The pros and cons of negative gearing need to be considered in relation to your cash flow and investment term, not just tax implications.

What Is Positive Gearing?

Positive gearing occurs when the income earned from a property is higher than the cost of owning a property. In this case, a property has a surplus after all the expenses have been met.

Investors who want a constant income, such as those who want to be financially independent or are close to retirement, prefer positive gearing. In the context of negative gearing vs positive gearing, this strategy is generally seen as lower risk but may offer slower capital growth.

Pros and Cons of Positive Gearing

Pros

• Extra income improves household cash flow
• Reduced financial stress during market downturns
• Can strengthen borrowing capacity

Cons

• Additional income increases taxable earnings
• Often associated with lower capital growth areas
• Fewer tax advantages compared to negatively geared properties

When making a comparison, investors have to weigh the pros and cons of both options.

Major Distinctions Between Negative Gearing and Positive Gearing

Strategic preference is the ultimately decisive force between negative gearing and positive gearing. Negative gearing is aimed at the future gains, allowing short run losses in view of the future increase in property value. On the other hand, positive gearing is concerned with short term earnings and financial security.

There are also investors who move from one form of gearing to another, depending on the rental returns or the reduction of loan repayments. The knowledge of the pros and cons of negative gearing, in comparison with the advantages of positive cash flow, can be helpful in creating a balanced portfolio for investors.

Which Strategy Is Right for You?

The discussion between negative gearing and positive gearing has no universal answer at all. Which is the right approach will depend on several factors:

• Your income level and tax position
• Ability to handle cash flow shortfalls
• Risk tolerance
• Investment time horizon

High income earners are likely to shift towards negative gearing, and income driven investors towards positively geared assets. The advice from the expert may assist in understanding the direction that would suit your goals.

How Capital Connections Can Help

Choosing between negative gearing vs positive gearing isn’t just about numbers. It’s about aligning your property strategy with the right lending structure. At Capital Connections, our interaction with investors includes analyzing cash flow, tax implications and long term aspirations prior to suggesting a customized finance solution. Our professional advice will help you to support your property investment plan with intelligent, long term lending choices.

Conclusion

The discussion between negative gearing vs positive gearing is not about who wins. It is more about which fits best with your individual circumstances. Both have a role in property investing if used correctly and with a plan in place. Understanding the cash flow and tax implications will position you in the best possible position to create wealth through property with confidence.

FAQs

1. Will lenders have different perceptions of both negative and positive gearing in loan consideration?

Yes, lenders consider cash flow carefully. Positively geared properties can improve serviceability, while negatively geared investments may reduce borrowing capacity depending on your income and expenses.

2. Is negative gearing suitable for first time investors?

Negative gearing can be good for new investors who have steady, high incomes, but it does require budgeting.

3. Is it possible for a negatively geared property to become a positively geared property?

Yes, it can through rental increases and a reduction in the loan amount.

4. Is positive gearing less risky?

In most cases, yes, because positive cash flow will decrease dependence on personal income to finance the investment.

5. Should I go for negative gearing or positive gearing for building long term wealth?

Both options can be used to create wealth, with negative gearing focusing on growth, while positive gearing focuses on income.