What is Positive and Negative gearing?
Often when thinking about investing in a rental property, you hear the terms “Positive Gearing” and “Negative Gearing”, but what is this actually referring to?
On one hand, Negative Gearing is an investment strategy where in the costs of owning the property, such as the mortgage payments, maintenance, repairs, property management fees, insurance and rates surpass the income produced by renting the property. Instead, you wait for the property to grow in value, and later sell it for a profit. The benefits to this strategy can include claiming losses on tax, including depreciation. The drawbacks include a tighter cash flow, and paying tax on capital gains.
Then there is Positive Gearing, or cash flow properties. This is where rental income is greater than costs of owning the property. While this strategy means the positive of a financial buffer and increasing your borrowing power for further investments, you do have to pay tax on the rental income, and it’s in your best interest to account for unexpected costs such as unexpected large maintenance bills.
Whatever investment strategy you pursue, it is in your best interests to gain a good understanding of the market in your area and what strategy will produce you the best results.
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