There’s no right or wrong answer to the increasingly pertinent negative versus positive gearing question. What works for one investor may not work for the next. It all comes down to individual goals, tolerance to risk and ability to service debt.
BY JAMIE MOORE
The general and often controversial argument is that negatively geared properties typically achieve higher capital growth but lower yields, while positively geared properties usually experience lower capital growth but higher rent returns.
Why’s that? Again, this is generally speaking, but properties that achieve high capital growth are thought to exist in major metropolitan areas where the value of the property is high in comparison to the rent it receives. On the flipside, it’s generally believed that positively geared properties are in regional or fringe areas of cities where the properties achieve high rents in comparison to the value of the property.
Of course, there are exceptions to these rules. Positively geared properties that achieve decent growth can be found. So what are some factors to consider about either strategy?
You might hit a serviceability wall quicker with negatively geared properties. It’s an issue some investors don’t consider early on. Properties that are negatively geared can quickly put a halt to an investor’s ability to purchase more properties because these properties cost you money to hold. Therefore your capacity to accumulate more liability is reduced.
A negatively geared property also needs to increase in value at rate greater than the cost of holding it. It goes without saying, but a property that’s costing you money to hold must grow to justify and outweigh your holding expenses.
There are lots of creative ways that can increase the rent your investment property receives, which improves its rental yield. These include renovations, allowing the tenants to keep a pet or adding an extension or granny flat that’ll allow the property to generate an additional income stream.
While negatively geared properties deliver a number of deduction benefits for investors, you’ll obviously need to pay tax on the income your positively geared property generates. This really shouldn’t be seen as an issue as it means that you’re making money – which is never a bad thing.
This information is of a general nature –always consult taxation professionals about the specific nature of your situation.