Hello again, reader! Welcome back to our blog space as today we shed some insight on positive and negative gearing!
It’s no secret that investing in real estate in Australia is one of the most beneficial and preferred ways of investment! But everything has risks attached if one is not careful enough. To go through this uncertain process, one must be tenacious and should be aware of the risks attached. Whenever someone invests in real estate, they ponder over the negative or positive gearing aspect of property before coming to a conclusion, and rightfully so!
Some believe that positive gearing is the only option when it comes to investing in property while some investors find more pleasure and contentment in negative gearing. The debate over positive and negative gearing has forced investors to be on the fence. If you are also indecisive and can’t pick between the two, then continue reading our blog, because it will definitely leave you with a better understanding of positive and negative gearing.
What is positive and negative gearing?
Positively geared properties are also known as cash flow properties. In simple terms, positive geared properties are the ones where the rental income you attain from the tenants living on your property is more than the cost you have to bear to maintain it.
On the other hand, negatively geared properties are also known as capital geared properties. Negative gearing is basically owning a property where the cost of maintenance, interest on mortgage, insurance, water bills, reparations costs, etc are higher than the rental income which you acquire from the tenants.
Negative and Positive Gearing, which is better?
As we have mentioned above, negative gearing is basically owning a property which does not provide you profit through the rental income due to less income and higher maintenance costs whereas, on the other hand, positive gearing helps you get profit due to higher rental income and low interest on mortgage.
So now the question arises: Which is the better investment option?
But the answer is not that simple, both positive and negative have their own assets and liabilities.
Positive gearing provides a consistent income and a great return on investment through low risk. On the other hand, negative gearing has its own benefits. Negative gearing may not give you as much profit as positive gearing due lower rental income, but it does have one key feature which attracts the investors the most. The main benefit of negative gearing is that the loss which you bear due to low rental income throughout the financial year may be offset against other income you earn, through your salary, which reduces your taxable income.
Benefits of Positive Gearing –
- Passive income – A positively geared property can provide you with a steady income stream as well as future capital gains if the property increases in value over time.
- Less cash flow risk – Because a positively geared property pays for itself, you don’t need to use other income to make your mortgage payments or have to consider selling under pressure if your financial circumstances change.
- Easier lending – With additional positive cash flow boosting your income, it can be easier to secure a loan.
Benefits of Negative Gearing –
- Reduction in taxable income – The loss made from a negatively geared property reduces an investor’s taxable income for each financial year. This tax offset can provide benefits for many types of investors, especially those with higher marginal tax rates, or rentvestors that are wanting to capitalise on their investment while they build their portfolio.
- Long-term benefits – An investor who is keeping their negatively geared property may be looking to capitalise by selling when its value increases or take advantage of higher rental returns in the future. This long-term capital gain often offsets the short-term loss!
With all that we’ve explained above, it’s obvious negative and positive gearing both have their pros and cons. To understand better how they work, get in touch with our expert property consultants to know how you can maximally utilise it to your benefit! , more about Positive and Negative Gearing
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