Investing in property can be a powerful wealth-building strategy for Australians.
We have watched as the property market has captivated news recently, from Queensland’s housing crisis to Sydney’s rising residential prices. City centres where the property was valued at the highest plummeted as work arrangements provided more flexibility and the population migrated to more rural areas.
These changes were unprecedented, yet the demand for property investment has not ceased.
If you are interested in entering the property market, there are two common investment strategies – Positive gearing and Negative gearing.
Understanding the key differences between these methods is essential for making informed decisions about your property investment journey.
Let’s dive into positive and negative gearing concepts and explore how to implement them and when.
What is Positive and Negative Gearing?
Positive Gearing:
Positive gearing is an investment property scenario in which the rental income generated surpasses the expenses incurred. These include:
- mortgage payments,
- maintenance costs,
- insurance, and
- other outlays.
This means the property generates more revenue than it costs to maintain, resulting in a net profit. In such cases, investors may enjoy immediate cash flow, enhancing their financial position.
Negative Gearing:
On the other hand, negative gearing is a situation where the rental income from the property is insufficient to cover all the related expenses. As a result, the investor incurs a net loss, which can be offset against other income sources, thereby reducing the overall taxable income.
Investors use negative gearing as a tax strategy to decrease their tax liabilities while aiming for long-term capital growth.
How to Implement Positive and Negative Gearing?
Positive Gearing:
Achieving positive gearing requires careful consideration and research. It involves selecting a property likely to provide a rental income that exceeds all associated expenses.
Positive gearing is often found in areas with high rental demand, lower property prices, and a history of steady rental growth. Conducting thorough market research and consulting with property experts can be beneficial in identifying positively geared opportunities.
Negative Gearing:
To implement negative gearing, investors must purchase an investment property expected to appreciate over time.
The rental income may not cover all expenses, but the investor can claim the shortfall as a tax deduction.
This strategy aims to benefit from capital gains in the long run, which could outweigh the initial cash flow deficit.
Why Do Investors Use Positive and Negative Gearing?
Positive Gearing:
Investors opt for positive gearing to enjoy immediate cash flow and additional income. It provides a regular stream of profit that can be used for other investments or to improve one’s lifestyle.
Positive gearing is particularly attractive for those seeking a steady income stream from their property investments.
Negative Gearing:
While negative gearing may lead to short-term losses, it is a popular strategy among investors thinking long-term.
The potential tax benefits can alleviate the financial burden, especially for high-income earners looking to reduce their taxable income. It may be a strategy used during tax planning while working with a financial planner.
When is the Optimal Time to Use Each Strategy?
Positive Gearing:
Positive gearing is an excellent strategy for investors who seek immediate financial gains and additional income.
It can be especially beneficial during economic stability or when interest rates are relatively low.
Additionally, positive gearing benefits retirees or individuals looking to supplement their income.
Negative Gearing:
The optimal time to use negative gearing is when there are prospects for significant capital appreciation in the property market.
A buoyant real estate market, where property values are expected to rise steadily, can increase the potential for future gains. These may eventually outweigh the short-term losses from negative gearing. However, it is not guaranteed.
Use The Best Strategy For Your Investment Future
Positive and negative gearing are viable strategies for Australian investors looking to build wealth through property investments.
Understanding which is the right choice for your investment portfolio can be complex. Seeking professional advice can be very beneficial.
When choosing between these strategies, it is essential to consider your financial goals, risk tolerance, and prevailing market conditions.
Lift Accounting and Advisory have financial advisors and experts to provide personalised guidance.
They can analyse your circumstances, assess the potential risks and rewards, and help you implement the most suitable strategy for your needs.
Seeking advice from qualified professionals will ensure you make informed decisions that align with your unique investment objectives.
Contact us to chart a successful path toward building wealth through property investment.
