Gearing your investment
When investing in property, you can choose to structure, or ‘gear’, your investment either positively or negatively. The strategy you choose will depend on both your investment goals and the property/s you choose to invest in.
There are arguments for and against both methods, but something to keep in mind is that no matter which method you choose to invest by, in order to maximise your benefits property investment should be seen as a long-term strategy.
Negative gearing
Negative gearing is an investment strategy that involves purchasing an investment where the ongoing costs outweigh the earnings. In the case of property, this means the rental income from your investment property does not cover all the expense associated with holding the property, including your loan repayments, property management fees, maintenance expenses etc. It is one of the easiest and most common ways to enter the investment market, as this method requires a much lower outlay to get started.
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How does negative gearing work?
Negative gearing relies on capital growth to earn the investor money and you will need to experience solid price growth for your property over the term of your investment to end up making a profit. An investor who has chosen to purchase via negative gearing may be more likely to use an interest only home loan.
You will need to be prepared to make a loss on your investment until it comes time to sell, and you should be aware that because you are not freeing up any equity in your investment property, it may be difficult to expand your portfolio.
While your investment is running at a loss, you maximise your tax concessions by offsetting some of the losses against your regular income.
Positive gearing
Positive gearing, on the other hand, is an investment strategy that involves purchasing an investment where the earnings outweigh the ongoing costs. In the case of property, this means that your rental income is greater than the expenses associated with your property, including loan payments, property management fees, maintenance expenses etc.
Positive gearing is an income-producing strategy designed to provide you with a regular income stream from your investments. The cash flow from positively geared properties may assist you to further build your portfolio.
You are likely to be charged tax on your investment earnings, and you are also likely to need a greater deposit to get started with this investment method.
Conventional wisdom states if your property has good rental returns, the capital growth outlook may not be as strong, and vice versa, but good research may help you to find a comfortable outlook for both aspects of investment.
It’s important to discuss your investment goals and strategy with an accountant or financial planner as well as your mortgage broker.
For more information on gearing your investment property
For more information on investment finance strategies or the loan that is in your best interest, talk to your local mortgage broker and we will return your enquiry within 2 business hours. Or call us at any time on 13 LOAN or direct on +61 2 9249 3739.
