Don’t know your negative gearing from your positive gearing? Cut through the jargon with our quick guide to gearing.
If you want to make it in property investment, it pays to get your head around a few things first. And at the top of that list is gearing.
Understanding what gearing is and how you can use it to maximise the returns on your investment is the key to growing your wealth. There are two types of gearing: negative and positive.
What is negative gearing?
If the expenses associated with your property are greater than the money you’re making from the property, you may be able to offset the losses against other income (like your salary) as a tax deduction. This is “negative gearing”. Expenses might be things like mortgage repayments, interest, costs of managing your rental property and so on. These “losses” are tax deductible.
In property investment, negative gearing not only opens the door to potential taxation benefits but also gives you the opportunity to make a long-term profit through capital gains. This is where, over time, the property’s value increases more than the costs.
While this is a popular tactic in property investment, it comes with risks. Sure, it’s true that the more you borrow, the more interest you pay and the bigger the tax deduction. But at the same time, you still need to pay the mortgage on time.
What is positive gearing?
As you’d expect, positive gearing is the opposite. The rent (income) from your investment property is more than the expenses, such as interest, loan repayments, maintenance and rates. So your property is making more money that it costs and is “positively geared”.
Positive gearing can happen when interest rates are low (as they are now), and average rental rates are high. However, some property investors have the golden touch and can achieve positive gearing from the get-go.
Need more information on negative and positive gearing for your property portfolio? Speak to our experts.