Negative gearing is a term that’s often in the media, but you don’t hear about positive gearing as much. Both are popular investment property strategies and it’s important to understand the difference between the two.
Gearing in the investment property context means taking out a loan to buy a property that you rent out to tenants. Positive gearing means that the tenant income from the property exceeds all of its associated expenses (excluding the initial amount to buy the property). In other words, you make ongoing profitable income from the property.
Examples of investment property expenses include:
When you buy a positively geared investment property, you can use the surplus income you generate to help you make your loan repayments. This can also help you to afford a higher value property.
Tenant income that you earn from an investment property is taxable, so it must be included in your annual income tax return. However, you can deduct investment property expenses from your tenant income to reduce the amount of tax you need to pay. This is a key difference between investment properties and owner-occupied properties. You can’t deduct any property expenses on your tax return for owner occupied properties.
The major benefits of positive gearing include:
With any investment property, there is always a degree of risk. For example:
Negative gearing is the opposite of positive gearing. It means that the expenses associated with your investment property exceed your tenant income. Many Australians have used negative gearing to build investment portfolios containing multiple properties to secure their financial future.
If you use negative gearing as an investment property strategy, it’s important that you have enough cash flow to be able to make your loan repayments. While you will be able to use some of your tenant income to help you with your loan repayments, you will also need to use income from other sources.
While on the surface negative gearing may appear to be a counterintuitive investment strategy (because you are technically making a loss), it can provide you with benefits, including:
There’s an old saying that the three most important factors in real estate are ‘location, location and location’. It’s especially true for investment properties. Buying an investment property in a good location can be a great way to build your long-term wealth. You’ll be more likely to attract good tenants who will pay their rent on time and look after your property. Properties in good locations are also more likely to grow in value over time.
Good investment property locations tend to have the following characteristics:
All of these factors tend to increase tenant demand.
At Now Living Realty, we can help you to find an investment property in a good location. We have properties available all over the Perth metropolitan area, and we’ll take the time to understand your needs.
Contact us today to find out more!