Negative Gearing vs Positive Gearing: Which Is Right for You?

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The Insider @ Houst
Last updated on
September 6, 2023
February 6, 2024

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Negative Gearing vs Positive Gearing: Which Is Right for You?

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Imagine trying to make your money work harder for you. That's where gearing strides in. It's like this strategic move where you use borrowed funds to power your investments. But here's the twist: those investment returns can swing in two ways - positive or negative gearing. And yes, both come with their own set of pros and cons.

Now, let's dive into some investment wisdom. When picking your investment path, keep your timeline, goals, financial landscape, and how much risk you're comfortable with in your sights. Once you've got that big picture in focus, the decision of going for a negative or positive geared property can slide right into place. It's all about setting sail with a clear map and your investment compass to guide the way. In this blog, we’ll discuss negative gearing vs positive gearing.

Table of Contents

Negative Gearing

You've invested in a property, and you're spending more than you're making from it. That's the essence of negative gearing. It's like a situation where your expenses give your income a run for its money, and the final tally leans towards a loss. Yep, we're talking about the good old negative net income.

Break it down further, and you'll find that the money flowing in is the rent from that investment property. But here's the twist: the money flowing out covers the property's ownership and management costs. That includes the interest on the loan plus the depreciation. When the income dance isn't enough to foot the bill of owning and managing the property, it's time to call it negatively geared.

Here's the fun part: Sometimes, the taxman might see your property as a negative gear champ, but in terms of cash flow, it's doing a positive jig. How's that possible, you ask? It's like tapping into depreciation benefits or working your financial magic with an offset account. It's all about keeping the income and expenses tango in check.

A balance scale tipping between a miniature house and a pile of coins, representing the financial considerations in property investment.

Upsides of Negative Gearing

You might be facing a loss on paper, but your property's worth might be having a growth spurt behind the scenes. Here's the twist: Those who venture into negative gearing are playing the long game. The idea is that the loss they're making now might be a warm-up act for the grand finale of their property's value skyrocketing. It's like placing a bet on your property's potential capital appreciation, all while wearing the "loss" badge.

There's more to the story. When you bid farewell to your property, you might encounter some tax stuff, like capital gains tax. So, while negative gearing might feel like a tax-saving magic trick, remember there could be some strings attached when it's time to part ways with your investment.

And guess what? While tax savings might not be the reason behind your investment choices, it's a worthy decision contender. Think of it as a little extra benefits of negative gearing of your investment journey.

Drawbacks of Negative Gearing

Now, let's talk real talk. Negative gearing doesn't come without its strings. You must be prepared to cover those losses from your pocket until the tax man comes knocking each year. Yep, that's right, you'll need enough financial muscle to tide you over until tax time arrives.

Here's another twist: running the negative gearing marathon could also slow your property portfolio's sprint. The cash you're diverting to cover losses could have been sprinting toward building your portfolio. Your extra funds are tied up in the investment waiting room.

And hold on because there's more. If your investment leans heavily on borrowed funds (aka debt), the party crashers could be rate hikes. When interest rates take a hike, you might be in the financial hot seat if unprepared.

Positive Gearing

Get ready to meet the bright side of the investment world - positive gearing! Here's the scoop: You borrow some moolah to snag an asset, and guess what? The income flowing in from that asset is jazzier than the expenses going out. We're talking about a rosy picture where your income is doing a little victory dance.

Now, let's break it down further. Positive gearing doesn't just mean income but regular income with capital appreciation. Think rent plus a little extra oomph from the property's value. And there's more good news: it's like living in a world where rental demand is sky-high, interest rates are keeping things pocket-friendly, and rents are strutting their stuff on the higher side.

Hold up, though. That income you're raking in is not just a free pass. It's got a date with your friendly neighbourhood taxman. That's right, the income is taxable and gets cosy with your marginal tax rate. So, while positive gearing doesn't shower you with tax perks, it still brings advantages. Like being that trusty companion helping you chip away at your mortgage, covering your day-to-day expenses, or even paving the way for your next investment adventure.

Positive gearing is like a star performer. It shines bright with net profit, treats you to some cash flow positivity, and combines steady income and capital gains. You'll often find this star shining over properties in regions where capital growth takes its time, but rental demand and rates are stealing the spotlight.

An overflowing piggy bank or raining money, symbolising the immediate profitability of positive gearing.

Upsides of Positive Gearing

Your investment is churning out cold, hard cash from the get-go. Yup, that's the beauty of positive gearing. From the very beginning, your property is not just an asset but also a money-making machine. With the income flowing in, you're not just covering your expenses but also sitting pretty on a nice little profit cushion.

Now, here comes the exciting part. That extra income is like a superpower for your financial goals. It's the cash you can stash away for your next investment's down payment. It's your ticket to expanding your property portfolio and growing your real estate empire. Alternatively, you might flex your financial muscles and knock down that mortgage principal faster than you can say "interest rate."

Positive gearing means you're not just in the property game but winning it. The extra income becomes your secret weapon, putting you in a stronger financial position and setting the stage for a more prosperous future.

Drawbacks of Positive Gearing

Now, let's dive into the fine print. While positive gearing might have you swimming in extra cash, guess what? The taxman wants his share of the pie. Yup, the more income you make, the more taxes you'll have to fork over.

In the end, positive gearing might be like a financial superhero, but even superheroes must pay their dues. Just keep that tax factor in mind as you navigate the world of positive cash flow investments.

A tax form and calculator on a desk, emphasising the tax considerations in positive gearing.

Negative Gearing vs Positive Gearing – Finding Your Fit

Here's the deal, and we're not going to sugarcoat it: There's no one-size-fits-all winner in the showdown between negative and positive gearing. Sorry to burst any bubbles, but the truth is, the "better" strategy depends on you – yes, you, the unique individual with your own financial story.

Imagine two friends, Investor A and Investor B, eyeing a property worth $700,000 with a rental return of $500. This could be a jackpot for Investor A – considering their tax bracket, goals, and risk appetite, it's a perfect fit. However, this property might be a mismatch for Investor B, whose financial blueprint is different.

But wait, hold up, the story doesn't end there. The juicy part is that the same $700,000 property might hold hidden potential. It could be sitting on a prime development spot, waiting to be split and sold for a land windfall. Investor A's plan to own and subdivide fits their retirement dreams like a glove, but it might be a no-go for someone else.

See, there's no black and white here. It's about finding a strategy that clicks with your unique tune – your goals, risk threshold, and financial jigsaw. The trick? Instead of boxing yourself into "positive" or "negative," focus on your end game.

But hold your horses! Brace for impact because investment rules aren't written in stone. Politicians love to tango with negative gearing rules, and some tried to do an overhaul (spoiler: they failed).

Imagine the perks vanish overnight. What's left? It's a mediocre property that's a cash-draining monster. And trust us, you don't want that.

So, buckle up, do your research, and talk to the experts. Sketch your property goals, connect the dots, and forge a path from A to B – where you are to where you want to be.

One thing's certain, though: the sooner you start building your empire, the better. Whether negative or positive, it's all about making those moves and securing your financial future.

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The Insider @ Houst

The Insider @ Houst

The Insider team at Houst is dedicated to providing up-to-date and relevant information on short-term rentals. If you have hosting inquiries, please write to us at expert@houst.com. For guest inquiries, reach out at guest@houst.com. We are here to help you navigate the world of short lets and look forward to assisting you with your needs.

The Insider @ Houst

The Insider @ Houst

The Insider team at Houst is dedicated to providing up-to-date and relevant information on short-term rentals. If you have hosting inquiries, please write to us at expert@houst.com. For guest inquiries, reach out at guest@houst.com. We are here to help you navigate the world of short lets and look forward to assisting you with your needs.

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"I have a philosophy in life called keep it simple. I don't live to work, I work to live. This is the first time I've leased this property on Airbnb. A house allows me to have vision of all the revenue and all the expenses associated with the apartment. They work as a well-oiled machine. They strive very hard to keep both myself and the tenants happy."

Jules
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"Honestly, if I didn't have Houst, I don't think I'd have this house anymore. With Houst's help, I can focus on my busy life while they manage my Airbnb listing. Guests call this place the 'magic cottage', and Houst makes it possible to share its special charm without any stress."

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