Gearing your property for positive results
If you’re thinking about investing in property for the first time you’ll need to consider if you want a negatively or positively geared investment. Why you’re investing will help you make this decision but to set realistic expectations you’ll need to be up to speed on the positives and negatives of each.
Positive and negative gearing explained
There are basically two ways you can make money through property investment; through income returns or capital gain.
When your investment income is greater than your investment expenses you’ll have positive income returns - this is a positively geared property.
Properties that return less rental income than the costs of owning the property are negatively geared. They’re expected to appreciate in value over time and are often called ‘capital growth properties’. This investment strategy relies on the property increasing in value over time to outweigh any short-term financial losses.
Pro’s to positively gearing your investment property
Obviously if you’re looking for more immediate returns then a positively geared investment may be more suitable for you.
If your income were to change this investment is also lower in risk. As long as the property is tenanted the rental income will cover the investment costs.
Like any additional income, a positively geared investment can increase your attractiveness to lenders if you were to apply for additional loans.
Down the track you may want to use a positively geared property to balance your portfolio. You can use the additional income to pay the shortfall of negatively geared investments.
Some things to consider about positive gearing
Whilst this investment will supplement your income remember it’s taxable. It’s smart to put a small amount aside each month to ensure tax time isn’t stressful.
Positive gearing is usually a short term strategy but might not make a big difference to your lifestyle or financial position. Often positively geared investments are located in regional areas and may return high rental income because of mining or infrastructure activity. This can cause (but not always) less or slower capital growth.
Pro’s to negatively gearing your investment property
The payoff comes when you sell if the property has produced above average increases in value over the long term.
Investing in capital growth property is a long term approach and should form part of a broader wealth strategy. Down the track this may involve using the equity in your property to purchase another. To do this you’ll need a property that is increasing in value over time which is why a property with high potential for capital growth is necessary.
You can also claim tax deductions relating to any expenses you incur on an investment property. So an advantage to negative gearing is in using this loss of income to reduce the amount of tax on your other earnings.
Things to remember about negative gearing
Negative gearing relies on the eventual sale providing the returns so you need to be comfortable with putting money in long term. It’s a good idea to build some equity early on so that if your income were to change, such as losing your job, you’d still be able to meet your repayments.
Can you get the best of both worlds?
A positively geared property usually won’t be a high capital growth property because of it’s location. To get the best of both worlds you should look at ways to increase your rental returns on your high growth properties. For example, by renovating your property you can increase your rental income and your depreciation allowances.