We have heard so much about positive and negative gearing, especially in the media during the most recent election campaign. It seems like positive and negative gearing is one of those terms that everyone is presumed to know the meaning of, but is so often misunderstood.

Positive and negative gearing is actually quite simple, so let’s break it down with some examples to see the pros and cons of each.

Positive gearing:

If a property is positively geared, it means you receive more rental income than the expenses you incur. Properties tend to be positively geared when there is strong rental demand and when interest rates are lower. Positively geared properties are also referred to as cash flow properties.

For example:

You buy an 4 bedroom investment property for $500,000

You have purchased in an area with a high demand for rentals

You rent the property for a very strong return of $600 per week

Your repayment costs (loan, rates, property manager) total to $505 per week

As a result, your property is paying for itself and you have an additional income of $95 per week. This is a positively geared property.

A pro of positive gearing:

Your income is increased and you do not incur out of pocket expenses

A con of positive gearing:

The income you generate is taxable

Negative gearing:

If a property is negatively geared it means the rental income you generate is less than the total costs involved with owning the property. Negatively geared properties are also called capital growth properties, as over time these investments are likely to grow in value and short-term losses are outweighed by long terms gains.

For example:

You buy an 4 bedroom investment property for $500,000

You have purchased in a stable area predicted to have high growth

You rent the property for $600 per week

Your repayment costs (loan, rates, property manager) total to $620 per week

As a result, you are out of pocket -$20. This is a negatively geared property.

A pro of negative gearing:

Negatively geared properties can claim full tax deductibles for all investment property related expenses and allows owners to reduce their taxable income.

A con of negative gearing:

Negatively geared properties require buyers budget so they can account for any shortfalls in the initial stages of their investment.