Positive Gearing vs Negative Gearing – Which is right for you?

Are you considering purchasing an investment property? Have you given thought to how the proposed investment slots in to your overall investment strategy? What are your goals? Are you investing for capital growth, or are you investing to generate an income stream? The answers to these questions will be crucial in determining how best to structure the finance that will fund the purchase of your investment property.

Gearing is a term used when you borrow to invest. Most investors, when considering an investment property, will need some form of finance to assist them in the purchase of their investment. If you also have savings that you can contribute to the potential investment, then you may not have to borrow as much.

So, what is negative gearing? To be negatively geared, means the cost of investment (the interest on your borrowings and any other costs associated with your investment) exceed the income generated by your investment (for direct property investment, this means the rental income). The advantage of a negatively geared investment is that in the short term, you gain a tax deduction from the net loss generated by the investment. In the long term, the aim is to achieve capital growth in the value of the investment that compensates you for the losses incurred in the short term, and creates additional wealth.

To be positively geared, means exactly the opposite. The income generated by the investment exceeds the cost. If you are seeking an investment property that will generate an immediate income stream for you, then you are going to need to ensure that it is positively geared. To do this, you will need to contribute a portion of your own savings, and keep borrowing low enough to ensure that the interest costs do not exceed the rental income.

Many investors choose to focus purely on the tax advantages of negative gearing, however, the long-term strategy of wealth creation must also be front of mind. Whilst you are gaining a tax deduction, you are still paying for the investment from other after tax earnings. You will need to ensure that you can sustain this cost for the duration of the investment.

If you are considering purchasing an investment property in the near future, come and speak to your launch broker today about the best way to finance your investment to ensure that your investment remains consistent with your long-term goals and objectives.