If you’re thinking about investing in the Australian property market, chances are you’ve heard the terms ‘negative’ and ‘positive’ gearing before.
What is negative gearing?
Put simply, negative gearing occurs when an investment property loses money each year. When this happens, the rental return you receive from your investment property is typically less than the total costs of maintaining it.
Examples of the costs associated with maintaining an investment property can range from big-ticket items such as your monthly loan repayments, council rates, and real estate fees – to ad hoc costs like those purchases related to building maintenance and repairs.
In short, a negatively geared property will require you to contribute additional funds from your back pocket each year.
What is positive gearing?
In contrast, positive gearing occurs when the revenue made from your investment property exceeds its expenses. Positively geared properties do not require you to allocate additional funds to service loan repayments or other costs.
So, which is the better option?
Determining whether to aim for positive or negative property gearing can depend on your long-term investment goals. If you’re hoping to earn extra income from your investment property each year, then you may be best placed to look at positive gearing. Although finding a positively-geared property that still has good growth potential can be challenging.
On the other hand, negative gearing can help to minimise your taxable income and may have more growth potential long term. For this reason, negative gearing is traditionally favoured by individuals who don’t need extra annual income but would like to see the value of their investment property increase long-term.
What should I consider next?
Before moving forward with any type of investment, it’s important to do your research. At Hatcher, we recommend taking a good look at your financial capacity to ensure that you could service an investment property throughout changing market conditions.
It’s also worthwhile thinking about those ‘surprise’ costs related to having an investment property, such as a sudden surge in Body Corporate contributions if you’re looking at an apartment or townhouse. Other costs like land taxes and landlord insurance cannot be passed onto tenants and need to be factored into your calculations.
Finding the right lender is also key, given there are many different types of investment loans on offer today. The good news is that your accountancy (hi, hello – we do this) can and should support you throughout the process of securing an investment property. There are many pitfalls that can be avoided with proper advice, so our first piece is don’t go it alone.
If you need help managing decisions around property investment, chat to the team at Hatcher.