We always talk about Positive & Negative gearing in terms of property investment but do you actually know what gearing brings you when we are investing on a property. what benefits investor will get from it. There are pros and cons of everything we do and its all depends on a situation what you want to achieve by investing in a property. Whether, its short term monetary gains to pay off your mortgage or long term benefit to build your portfolio.
Buying a property is never been a bad investment decision unless you buy a property without research. Its better to consult with an expert before bringing trouble in the long run. When you borrow money to invest in property, you may find yourself thinking:
where to buy???
how to buy???
what to buy???
and why this particular property???
A negatively geared property is one in which the costs of owning an investment property are more than the income you receive from the property.
It can be:
– loan repayments & interests
– Land tax
– Maintenance etc etc
I have mentioned the tax benefits of keeping a rental property on my previous post.
Negative gearing occurs usually at the beginning of your investment as you will be paying more on your mortgage in the beginning.
On the other hand, A positively geared property is one in which the income of that investment exceeds its expenses and its good for the capital growth in the long run when you buy positively geared property.
Properties often become negatively/positively geared depending up on time frame as in the beginning of your investment, mortgage and interest rates against the property could be slightly more and if you own the property for reasonable period of time- the repayments could be less but the maintenance expenses tend to increase even if your mortgage repayments partially and fully paid off.
Due to the tax deduction benefits negatively gearing can be helpful strategy to retain the property. However, it involves an investment property running at a loss, there are risks involved – mainly not being able to afford to pay the costs of owning a property if your income suddenly falls.
Investors should have a financial strategy to retain their property if they have following situation:
– lose their job or other income
– if the costs of owning the property increase such as maintenance, council fees, interest rates. or
– if the income from the property falls such as rents could drop, or the property could be vacant for a period of time.
For more information on positive/negative gearing speak to your accountant or visit ATO website.