In property investment, ‘gearing’ means taking out a loan or borrowing money to purchase a real estate asset. The question is often “Should investors aim for properties that are positively geared or negatively geared”? This depends on your investment strategy.
A property is positively geared if the income from the investment is higher than the interest and other expenses. This means that the investor receives positive cash flow. Tax will then need to be paid, on the extra money received, as it is additional income.
If the property’s value increases from the purchase date to the sale date, the investor may receive a capital gain. This increase in cash-flow can lead to higher income, the investor could consider diverting these additional funds to grow their property portfolio OR they can use the profit to pay down the principal on their mortgage.
Negative gearing is often used as a popular tax minimisation strategy, it can be attractive to investors due to the tax benefits of an investment loss.
A negative gearing strategy allows the property-related costs to be paid for by your tenant through rental returns and also by the Australian Taxation Office through tax savings. Fundamentally, negatively geared properties reduce the investors tax as their income is reduced.
Should you negatively or positively gear your property investment strategy?
There are many considerations and ultimately it depends on your circumstances, your income, your current wealth situation, what sort of a mortgage you have or plan to get. All of these things and more will influence whether or not your property should be positively or negatively geared.
It is important to remember that Cash flow is what allows an investor to be in the market and capital growth is what allows an investors portfolio to grow. This provides an investor with choices in the future for their retirement and current and future lifestyle.
If you’d like to discuss your options with us directly, call 1300 155 661 or click here and we’ll contact you when it’s convenient for you.