Read our article which gives a simple explanation and breakdown of what exactly positive and negative gearing means.

When it comes to investing in property, it can be quite the minefield to navigate, especially if it’s your first time. With so much jargon and terminology being thrown around, it can be overwhelming. So we’ve decided to break down two common terms that you’ll often hear when talking about investment properties; positive gearing and negative gearing. Below we’ve given straightforward explanations of these terms and what exactly they could mean for you financially:

What is Positive Gearing?

Put simply; positive gearing means that you have more income from your investment property than you do outgoings. For example, if your weekly outgoings for your investment property- like the mortgage repayments, rates, maintenance etc.- are $600, but your tenants are paying $700 a week then your property is positively geared. Essentially you are making money off of your property and benefitting from a net gain. A positively geared property is often referred to as a ‘cash flow property’. 

When Does This Happen?

Positive gearing is most likely to happen when interest rates are low and rental rates are high due to strong demand in an area. 

What is Negative Gearing?

Negative gearing is essentially the opposite of positive gearing. This means that the outgoings which you are spending on your investment property exceed the money you are making from tenants. These investments are often referred to as ‘capital growth properties’. 

The benefit of a negatively geared investment property is that they are generally expected to increase in value over time. Those with a negatively geared investment expect that the long term benefits they will reap from their property will outweigh the short-term costs. 

When Does This Happen?

Imagine a scenario where you have purchased a property in a stable area which looks set to have a high growth rate. There may be many rental properties available in this which means you have less of a ‘monopoly’ on the market and can’t ask for high rental rates. 

In this scenario, you may have paid $500,000 for your house and rent it to tenants for $480 a week. If your costs and repayments total $500 a week, then you are losing $20 each week. However, if your strategy is successful, then the capital returns, which you will eventually gain from this property will equal more than $20 a week, and you will have made a successful investment. 

Don’t Forget About Tax

When purchasing an investment property, it’s imperative to be aware of the tax implications involved with both positively and negatively geared investments. 

Any income that you earn on a positively geared property is taxable, just like your regular income or salary. Alternatively, a lot of investors opt for a negatively geared property as they will be able to claim tax deductions for expenses incurred. By claiming these deductions, you can reduce your financial short-fall and ultimately, the amount of taxable income that you earn. 

If you would like more advice on positively and negatively geared properties or have general questions about investing in property, contact us at Heimat today! We are experts in property management and make it our mission to ensure that investors have peace of mind and the utmost level of support and service.