Positive Gearing vs. Negative Gearing

When it comes to property investment, one of the key decisions investors need to make is whether to pursue a positive gearing or negative gearing strategy. In this blog post, we will explore the differences between positive gearing and negative gearing, and the advantages and disadvantages of each.

Positive Gearing

Positive gearing refers to a situation where the rental income generated by a property is greater than the expenses associated with owning and maintaining the property. In other words, the property is generating a profit, which can be used to pay down debt, reinvest in other properties, or provide a source of passive income. Some of the advantages of positive gearing include:

1. Generates Additional Income: Positive gearing generates additional income for the property owner, which can be used to fund other investments, pay down debt, or simply provide a source of passive income.

2. Reduces Financial Risk: When a property is generating positive cash flow, it is less likely that the property owner will encounter unexpected expenses or default on the mortgage, as the income generated by the property can cover the ongoing expenses associated with owning and maintaining the property.

3. Provides Tax Benefits: When a property is positively geared, the income generated by the property can be used to offset the expenses associated with owning and maintaining the property, which can result in a lower tax bill for the property owner.

Negative Gearing

Negative gearing refers to a situation where the rental income generated by a property is less than the expenses associated with owning and maintaining the property. In other words, the property is operating at a loss, and the property owner is required to cover the shortfall. Some of the advantages of negative gearing include:

1. Provides Tax Benefits: When a property is negatively geared, the expenses associated with owning and maintaining the property can be used to offset the property owner's taxable income, which can result in a lower tax bill.

2. Potential Capital Growth: While negative gearing doesn't generate income, it can potentially lead to capital growth over time. This is because property values may increase over time, which can potentially offset the losses incurred during the negative gearing period.

3. Greater Flexibility: When a property is negatively geared, the property owner has more flexibility in terms of how they use the property. They may choose to live in the property, rent it out, or use it for a combination of both.

Some of the disadvantages of negative gearing include:

1. Increases Financial Risk: When a property is negatively geared, the property owner is required to cover the shortfall between the rental income and the expenses associated with owning and maintaining the property. This can increase financial risk, particularly if interest rates rise or unexpected expenses arise.

2. Limited Cash Flow: Negative gearing doesn't generate income, which means the property owner may need to cover the shortfall out of their own pocket. This can limit cash flow and make it more difficult to fund other investments or expenses.

3. Reliance on Capital Growth: Negative gearing relies on the assumption that property values will increase over time, which may not always be the case.

In conclusion, both positive gearing and negative gearing have their advantages and disadvantages, and the choice between the two will depend on your personal financial situation, investment goals, and risk tolerance. It's important to do your due diligence, seek professional advice, and assess the potential risks and rewards before making any investment decisions.