The basic definition
When the cost incurred by an investment exceeds the income it generates, the investment is said to be negatively geared. When your investment is generating more income than its ongoing costs, then your investment is positively gearing. Otherwise, when your investment is breaking even, it is neutrally geared.
Why negative gearing?
Okay, so negative gearing means your investment is losing money, why do some people favour it? The Australian Tax Office allows investors to claim an investment property’s net loss against your personal taxes, for a more comprehensive guide, please refer to the ATO website. This basically means the government is helping you offset investment losses. If you are on the top income bracket, up to 45% of your net losses are covered by the government, meaning you can withstand more investment risk.
Just because part of your investment risk is offset by your tax refund, it doesn’t mean you should utilise negative gearing, after all, you are still making a loss!
With any investment strategy, you should be looking for a net overall gain on the day you choose to sell off your investment. That is, if you are thinking of buying an investment property that will generate a net negative cashflow and you are planning to hold it for 5 years, make sure you can withstand the ongoing losses and have the confidence the property capital growth covers your net losses over the 5 year period!
In summary, investors utilising negative gearing is banking on purely capital growth, that is, only invest in a property you plan to negative gear in a bullish market.
Positive gearing - be safe, be happy
If you are a risk adverse investor, it is always wise to stick with a positive gearing strategy. You can utilise our affordability calculator to quickly work out if the property you are planning to invest in will produce a net positive cash flow or not.
Having a positively geared property investment goes a long way. Yes, you need to pay additional taxes on your net rental gains but that is funded by your investment making money in the first place! Imagine a bearish property market, if your investment property is positively gearing, all you need to do is to hold onto the property until it rises again without much stress.