Understanding Negative Gearing and Positive Gearing as a Property Investor
As a property investor, it is crucial to understand a variety of financial strategies like negative gearing and positive gearing. Understanding these terms can help you maximize your returns and make informed decisions. Without further ado, let’s delve into the concepts of negative gearing and positive gearing and why they matter.
Positive Gearing is a situation where the rental income of a property exceeds the cost of owning and maintaining the property. In simpler terms, you make more money than you spend on your rental property.
For property investors, positive gearing is a desirable strategy as it means they can enjoy steady cash flow from their assets. However, it’s essential to choose the right location for investment as you need to ensure that the rental income is high enough to cover all expenses and make a profit.
High growth locations and corporate leasing agreements are often the best choices for positive gearing. This method is ideal for investors who want the cash flow potential of their properties to lead to long-term wealth and passive income.
On the other hand, negative gearing happens when your rental income is less than your property’s running expenses. In other words, it’s a strategy where you make a loss on your property.
While this might sound counterintuitive, negative gearing remains a popular way for individuals to gain the benefits of investing in rental property. In this strategy, property investors offset their losses against taxable income, therefore reducing their overall tax liability.
This strategy often involves buying property for capital gains, which are long-term profits. Individuals who assume a potential increase in their property value apply the negative gearing strategy to offset the loss against their overall portfolio offering their long-term investment a greater return.
Benefits and Risks of Negative and Positive Gearing
Positive gearing’s primary benefit is the immediate cash flow it provides. Because the income outweighs the costs, there are profits, which allows investors to return their investments sooner.
Negative gearing strategies may initially mean a loss, but with the right tactics, negative gearing investors can offset this loss against their tax liability, which often leads to developing a higher overall return on investment.
The risks associated with negative gearing are that investors assume the value of their property will rise enough to cover the costs eventually. However, there is always the possibility that a property will not gain value or could even decrease in value.
Positive gearing too can have its own risks, like the risk of not having any financial cushion to cover any unexpected expenses.
As you can see, negative gearing and positive gearing strategies have significant differences and benefits when it comes to the overall returns on investment. As a property investor who intends to maximize returns, it’s important to consider and analyse the circumstances and goals you have in mind for your investments.
Although both strategies have their advantages and disadvantages, choosing the most suitable method can help you become profitable in your approach to long-term rental property investments. Whether you’re just starting your investment property journey, or are a seasoned property investor, Kitty & Miles is THE property buyer agent you need to help guide you in your next purchase! Give us a call on (02) 8916 6172 or email our team at firstname.lastname@example.org for more information!