Jehoshaphat, “Negative gearing is the best property investment strategy”.
Geraldine, “Are you positive?”
OK, so we’ve all heard about positive and negative gearing with regard to property investment. But which one is the best strategy?
Put basically, positive and negative gearing go like this:
Positive Gearing: Generally used to create revenue, i.e. cash in your pocket after all expenses for the property have been accounted for. The property may likely increase in value over time, however while rents in some regional areas such as mining towns can be outstanding, they are also usually volatile and heavily dependent on the health of the local industry. The usual location of positive geared property isn’t usually conducive to capital growth.
Extra income from the positive gearing however can be used to pay down the mortgage or to reinvest in the property by way of capital improvements, making it even more positively geared, or for you to use to live on or improve your lifestyle. With enough of this type of investment, your oceangoing cruiser, or that classic HSV Club Sport might be looking good. Being that you are earning money, you will need to pay tax on earnings. As such, some investors believe positive gearing to be a poor investment strategy.
Negative gearing, being the opposite to positive gearing, naturally works in the opposite way. Usually negatively geared property has quite good capital growth prospects. With the usual location being in popular areas and more often than not, within a reasonably short distance from the CBD or socially affluent “trendy” areas, rents are not high enough relatively speaking, to cover the costs of the property.
Extra cash for the mortgage payments and maintenance etc., must therefore come from another source, usually the owner’s pay packet. Negatively geared property does however provide a tax concession for losses which may be able to be claimed against other income. Your accountant should be consulted to determine such tax matters. The problem with this however is that to access such tax claims means that you must first lose money. As such, some investors believe negative gearing to be a poor investment strategy.
Are you getting the picture now? Obviously, whether you go positive of negative geared in your strategy selection, depends largely on your own personal situation, your goals and the advice passed on to you by your finance professional. Remember the “team” we spoke of way back? This is one of the reasons that you must acquire a good team around you. Your finance professional is part of your team.
“Well Geoff, how did you get so many properties?”, I hear you ask. Here’s how I did it:
I, as do many other investors, maintain a balanced portfolio. Firstly, I purchased one negatively geared investment property. Secondly, using some of the equity from that property, I purchased a second negatively geared property. Doing the sums however, it didn’t take long to realise that if I bought a third negatively geared property, that would be it. I would be pouring all of my pay into only three properties. That would mean goodbye early retirement. After reading a few books and attending a seminar, I realised that if my third purchase were a positive geared property, I could continue on my merry way to owning multiple properties.
Find your right balance.
The balanced result is now a portfolio that pays for itself, while also allowing for certain tax concessions against other income. With a buffer fund to take care of any unexpected volatility or rental vacancies, there’s not too much to worry about…………unless maybe a worldwide pandemic. Oh, wait a minute, I got through that without any worries too.
There are other property strategies that you can choose to use, and most can be used in conjunction with negative and positive gearing. Speak to the people in your property buying team to sort out the right strategy for you before you start so you can write down your end goal. Once you’ve done that, don’t forget to call us here at PPBA to speak to us about finding the right property to fit your strategy. We can work in with your property team, or we can suggest the professionals we use ourselves to start you on your way and to keep you going into retirement or even longer……….who knows? Maybe you can take it with you.
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