Positive, neutral, and negative gearing explained.
You might have heard of negative gearing before, but what’s all the hype about? Let’s dive into the pros, cons, and ways you can gear an investment property.
What are positive, neutral, and negative gearing? And how do they work?
If you have a positively geared investment property, your rental income is more than your expenses, including interest repayments and maintenance costs. You’ll end up with a profit.
A neutrally geared property means your rental income is equal to your expenses.
And a negatively geared investment property means your rental income is less than your expenses, so you make a loss on your investment.
What are the pros of negative gearing?
You might be wondering, is negative gearing a good thing? How can something negative be positive? A key benefit of negative gearing is that you might claim your losses as a tax deduction. As well as this, your property will hopefully increase in value over time, otherwise known as capital growth.
Here’s an example of negative gearing. Lee bought an investment property for $600,000. His yearly expenses were $30,000, and his rental income was $20,000, so he lost $10,000. Lee then claimed his losses at tax time to reduce his taxable income. After the first year, his property value also rose by 6%, which is great news for Lee in the long run.
As a heads up, property taxes change from state to state, so what’s allowed in NSW might be different in VIC, QLD, or elsewhere. Chat with a tax expert for advice relevant to your situation.
The cons of negative gearing
In the short term, as negatively geared properties don’t make a profit, you’ll probably need cash in the bank to cover your losses. Plus, if interest rates rise and you can’t meet your new repayments, you might have to consider selling the property.
What are the pros of positive gearing?
We reckon the main benefit of positive gearing is cash flow. Once you’ve sorted out your monthly expenses, a positively geared property will give you more money to play with. Who doesn’t want that? And if you’re saving up for another investment property, the extra cash coming in the door could help you get another loan.
The cons of positive gearing
The extra money is nice, but it means you pay more tax. If you live in an urban area, you might have to travel further to find an investment because positively geared properties are more common in regional towns.
Before jumping into the property market, discover which gearing strategy will work best for you. Then it’s time to track down a home loan that suits your needs. Check out the competitive interest rates on our ubank home loans.