Last updated on November 20th, 2020 at 10:51 am
If you’ve considered investing in the property market, there is a chance that you may have been baffled by the complexities of “positive” and “negative” gearing schemes.
However, determining whether your property will be positively geared or negatively geared is an important step in the investment process. For a better understanding of the benefits and potential drawbacks of these schemes, we have compared the two strategies below:
Opting for a positive gearing strategy is generally considered the safer and more conservative option. Positive gearing occurs when the rental income on your investment property exceeds the cost of maintaining it. This includes the cost of mortgage repayments, interest rates and maintenance fees. Positive gearing schemes are sometimes more favourable, as the extra cash-flow results in an immediate short-term profit.
Negative gearing occurs when the rental income is less than the costs of maintaining the home. As the property is running at a loss, investors need to use their own funds to make up the difference. The benefit of a negatively geared investment is that the value of the home is likely to grow in time. It is expected that the increased profit from selling the property will outweigh the initial financial losses. Further, thanks to the available tax deductions, negative gearing can be a helpful strategy for offsetting the costs of acquiring an investment property. Negatively geared homes are likely to be in more populated areas like capital cities, where there are fewer factors that can affect their value.
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