AS PUBLISHED IN BUILD IN COMMON – TILT MARCH 2019
There are two main types of property investors, and their different strategies at the time of purchasing an investment usually result in the debate around negative gearing vs positive gearing. This is an important consideration when choosing the right property investment strategy. So, let’s explore what these two terms mean and how different types of investors operate within each approach.
What Is Negative Gearing in Property Investment?
Negative gearing is a situation where the costs of holding a rental property (including interest on the mortgage, property management fees, rates, body corporate fees, maintenance costs, and other expenses) exceed the income generated through rent received on the property.
As a result, the investor must use income from other sources to support the investment over the short term. While there are currently tax benefits associated with negative gearing, these are simply a consequence of this investment strategy, not the primary reason an investor should purchase a negatively geared property.
But you may be asking, why would anyone invest for a negative outcome? That simply does not make sense, does it?
The answer is simple.
Negative gearing is usually a consequence of a capital growth property investment strategy.
Why Do Investors Choose Negative Gearing?
Investors choose negative gearing to pursue long-term capital growth, accepting short-term cash flow losses in exchange for compounding property value increases and the potential for future positive cash flow.
Investors buying in locations that have historically demonstrated strong capital growth are often purchasing in areas where property prices have risen faster than rental income. Over time, as rents increase and loan balances reduce, many negatively geared properties eventually become positively geared.
No investor aims for a negative outcome. However, those focused on long-term wealth creation understand that a short period of negative cash flow can be outweighed by the benefits of compounding capital growth. When executed correctly, this approach can deliver substantial long-term returns despite higher holding costs in the early years.
What Is Positive Gearing in Property Investment?
The alternative to a negatively geared investment is positive gearing. This occurs when the rental income received from a property exceeds the costs of holding that property, resulting in surplus income for the investor.
Positive gearing is the result of a cash flow–focused property investment strategy.
For many investors, this approach is appealing because it can supplement income earned from other sources. In some cases, a well-structured cash flow portfolio can even replace income from employment, although this typically requires ownership of multiple investment properties.
Is Positive Gearing Better Than Negative Gearing?
Positive gearing is not inherently better than negative gearing. While it provides immediate cash flow, it often comes at the expense of capital growth, making it less effective for long-term wealth creation.
Cash flow properties frequently generate taxable income but offer limited capital appreciation. This trade-off means the investor may benefit today but miss out on significant long-term growth.
Another important factor to consider is this: why would tenants pay more rent than it would cost them to buy and own the same property? In most cases, these properties are located in lower socio-economic or regional areas, which can present increased risks for property investors.
Choosing Between Negative and Positive Gearing
There is no right or wrong strategy when it comes to property investment.
The best approach depends on your financial goals, risk tolerance, income position, and personal circumstances. When comparing negative gearing vs positive gearing, there is no one-size-fits-all solution.
Developing a strategy aligned with your objectives is essential. If you are unsure which approach is best for you, seeking professional advice can help ensure the right foundations are in place from the outset, ultimately supporting stronger outcomes over the long term.
Expert Support for Informed Property Investment Strategie
At Streamline Property Buyers, one of Brisbane’s most awarded buyers agents, we help investors and home buyers focus on properties that align with their preferred investment strategy, whether that is negative gearing or positive gearing.
From research and analysis to competitive offers, negotiation, and risk management, our team works to ensure investors make informed decisions. This approach helps you select properties that match your financial goals, reduce holding costs, and achieve sustainable performance over time, reflecting the same careful strategy considerations discussed in the negative vs positive gearing sections above.
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