Q: I am hoping to buy my first investment property in the next six to 12 months, but I’m not sure what the difference is between positive and negative gearing, or how to work how which is best for me. Can you help?
A: When deciding which investment strategy is right for you it’s also really important to think about, and understand, whether you want your investment property to be positively geared or negatively geared.
There are a few simple questions which can help you work out the right approach pretty quickly, like are you investing for short or long term gain, and do you want a lump sum payout or regular cash income?
But I think the main question to help you work out if positive or negative gearing is better for you is:
Do you need the income from your rental property to be higher than the costs of your investment property?
If you answered yes, then generally speaking that means you need your property to be positively geared.
In a nut shell, positive gearing applies when the money you receive on a rental property is higher than your expenses, like the mortgage repayments, insurance, strata and other ongoing costs. This generated some level of income for you and means that your investment property costs don’t come out of your own pocket.
Positive gearing is typically paired with a rental return or cash flow investment strategy. This is when you buy a property that will deliver a strong rental return through high rents. These properties are more often found in regional or outer suburban areas where rental demand is strong.
Negative gearing is essentially the opposite. This means the property’s expenses are higher than the income you receive, so you will be out of pocket overall.
One approach isn’t ‘better’ than the other; it mostly depends on your personal circumstances and what you want to get out of your investment property.
Knowing your investment strategy is important, and seeking expert financial advice is smart if you need help determining the right approach for your finances and goals. An accredited mortgage broker can also help you learn more about how you can structure your home loan to suit your needs.
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