There are many factors to consider when purchasing an investment property, but one that’s often overlooked is the gearing generated from the investment. Find out whether it’s positive or negative gearing that will get your investment goals turning.
If you have considered investing in property you’ve probably given thought to a lot of different factors that will affect your investment. These could include, how the new investment will fit into your current investment portfolio or how it will kick one off, whether it’s for income generation or capital growth, and the short and long-term goals you’re aiming to accomplish.
But have you considered which type of gearing will work best in your favour to achieve these goals?
What is positive gearing?
There are two types of gearing to consider when you’re investing, let’s first look at positive gearing. To be positively geared means the income generated from your investment – that is, the rental income- exceeds the cost of your investment – that is, the interest you are paying on it plus any other costs associated with it.
Simply equated: Income > expenses = positive gearing.
Positive gearing is the aim if you are looking for a property that will immediately generate an income stream for you. To achieve this, it is likely you will need to contribute a larger portion of your savings to minimise borrowing, and in-turn minimise interest repayments to below the rental income.
What is negative gearing?
So, for every positive there is generally a negative, but in this case we don’t mean negative in a bad way. You would be right to assume that negative gearing is the exact opposite of positive gearing. This means, the cost of investment exceeds the income generated from the investment.
Therefore : Expenses > income = negative gearing.
The advantage of negative gearing is the tax deduction investors can be entitled to in the short-term for the loss generated by the investment. In the long-term, the goal with negative gearing is the value of the investment appreciating to compensate for the income lost initially. It‘s easy for investors to focus predominantly on the tax advantages of negative gearing, however, the long-term appreciation on the investment should not be forgotten. It’s important to ensure you can sustain the costs until the long-term benefits come into fruition.
So as we can see, there are benefits to both positive and negative gearing. What’s right for you can only be determined by the goals you set out to achieve. If you are considering purchasing an investment property, consult the Settlement Group professionals. They are equipped with the knowledge to give the best advice about your investment to help achieve your short or long-term goals.