The mistakes, the pain and the cure: navigating the maze of positive and negative gearing
Property investment is a powerful wealth building tool but only if you understand the risks and avoid common - and expensive - mistakes.
Whether you choose positive gearing or negative gearing for your property investment strategy, there are common mistakes that can derail your wealth-building journey.
Understanding these mistakes can help you avoid financial stress, missed opportunities, and long-term losses.
Common mistakes with positive gearing
1. Prioritising
The mistake: Investors focus solely on achieving high rental yields (positive cash flow) but choose properties in poor locations with low demand or limited growth potential.
How it hurts: While the property generates cash flow, it may fail to appreciate in value, limiting your long-term wealth.
How to avoid it: Focus on areas with a balance of solid rental yields and steady capital growth, including regional towns with growing populations and local infrastructure that are not tied to a single industry or large-scale employer.
2. Underestimating rising costs
The mistake: Assuming that because a property is positively geared today, it will always be profitable. Investors overlook rising expenses such as:
- interest rate increases
- higher council rates or strata fees
- costly maintenance and repairs
- annual land tax
- rising insurance premiums.
How it hurts: Your positive cash flow can quickly turn neutral or negative, leaving you with an underperforming asset.
How to avoid it: Regularly review your cash flow and maintain a buffer fund to cover unexpected expenses.
3. Over-leveraging to buy multiple positively geared properties
The mistake: Investors take on excessive debt to buy multiple positively geared properties, believing that the cash flow will always cover their costs.
How it hurts: If interest rates rise, vacancies increase, or rents drop, you may struggle to cover your loan repayments.
How to avoid it: Use conservative leverage (60-70 per cent LVR) and avoid buying too many properties too quickly.
4. Ignoring tax planning opportunities
The mistake: Assuming that positive gearing means you cannot save on tax. Investors often fail to claim deductions for:
- Depreciation on building and fittings
- Interest expenses on the loan
- Property management fees.
How it hurts: You miss out on valuable tax deductions, reducing your net return.
How to avoid it: Use a qualified accountant experienced in property investment strategies to ensure you maximise tax benefits without creating negative cash flow. Have all property expenses paid for by the property management team from rent so all expenses are tracked and claimed correctly.
5. Choosing poor-quality properties
The mistake: Focusing on properties with high rental yields but poor build quality, high vacancy rates, or low tenant demand.
How it hurts: The property may suffer frequent vacancies, high maintenance costs, or capital depreciation.
How to avoid it: Prioritise quality properties in areas with strong rental demand and potential for capital growth.
Common mistakes with negative gearing
1. Overreliance on tax benefits
The mistake: Believing that negative gearing is a "guaranteed" way to reduce tax, without understanding that you are losing money to gain a smaller tax deduction.
How it hurts: You can end up losing more in cash flow than you save in tax, especially if your income is lower than expected.
How to avoid it: Only use negative gearing if you have a high income and can comfortably cover the losses.
2. Investing in poor growth locations
The mistake: Choosing negatively geared properties in areas with little or no capital growth potential (e.g. off-the-plan apartments in oversupplied markets).
How it hurts: Even if you save on tax, your wealth does not grow because the property value remains flat or declines.
How to avoid it: Only use negative gearing in high-demand locations with strong long-term growth potential.
3. Misjudging cash flow capacity
The mistake: Overestimating your ability to cover the losses from a negatively geared property.
How it hurts: If interest rates rise or your income drops (e.g., job loss, reduced hours), you may be forced to sell the property at a loss.
How to avoid it: Maintain a cash buffer and ensure that your other income is sufficient to cover the shortfall.
4. Ignoring the impact of rising interest rates
The mistake: Assuming that interest rates will always remain low, making it easy to afford a negatively geared property.
How it hurts: When rates rise, your loan repayments increase, making the property even more negatively geared. From May 2022 until the end of 2024 there were 13 rate rises in 15 months and that hurts.
How to avoid it: Stress-test your cash flow for higher interest rates before purchasing.
5. Failing to plan for capital gains tax (CGT)
The mistake: Assuming that selling the property at a profit will be tax-free or that CGT will be minimal.
How it hurts: When you sell, CGT can significantly reduce your profits, especially if the property has grown in value and you are on a high marginal tax rate. Also, depreciation claimed throughout the ownership period is clawed back upon sale increasing the CGT further.
How to avoid it: Plan your exit strategy carefully, holding the property for at least 12 months to qualify for the 50 per cent CGT discount. A minimum seven to ten year holding period is recommended.
6. Negative gearing without a capital growth focus
The mistake: Choosing negatively geared properties without strong growth potential, such as apartments in oversupplied areas or low-demand suburbs.
How it hurts: You suffer losses each year without gaining any significant capital appreciation.
How to avoid it: Only negatively gear properties in premium locations with proven long term growth potential (e.g., inner-city suburbs, premium coastal areas that are in demand or areas with a rising population and approved government infrastructure to support the population growth).
7. Relying on property spruikers
The mistake: Following property spruikers who promise wealth through negative gearing but sell overpriced or poorly located properties.
How it hurts: You end up with a property that loses value, with rent that barely covers the interest payments.
How to avoid it: Always conduct your own research and seek independent advice.
How to get it right: strategies for both approaches
Positive gearing: best practices
- Prioritise quality properties in high-demand areas with a balance of yield and growth.
- Regularly review your cash flow and adjust rent to keep pace with market rates.
- Use cash flow to pay down debt faster, increasing equity.
- Diversify your portfolio to reduce risk.
- Structure ownership so the rental income goes to the lowest income earner or consider a family trust structure.
Negative gearing: best practices
- Only negatively gear in high-growth locations where capital gains are likely.
- Stress-test your cash flow for rising interest rates.
- Maintain a buffer fund to cover losses if rents drop.
- Assume 3 to 4 per cent of purchase price as an annual holding cost above rent as a suitable estimate in early planning.
- Plan your exit strategy to minimise CGT, using the 50 per cent discount.
Final thoughts
Property investment is a powerful wealth-building tool but only if you understand the risks and avoid common mistakes. Whether you choose positive or negative gearing, success comes down to:
- Smart property selection (quality over quantity).
- Securing a property for the least amount possible is ideal (don’t overpay)
- Consider properties that you could bring added value (equity) to, at minimal cost (tidy up or renovate yourself)
- Considered borrowing (just because you can borrow a large amount doesn’t mean you should).
- Do not pay more off an investment loan mortgage than is required when you have a loan on your own family home. (reduce private/non-investment debt first)
- Regular financial reviews (monitor cash flow and expenses).
- Multiple properties across multiple states, not multiple properties in a single state (state land tax)
- When using equity release on an existing property to acquire a new one, the equity release loan belongs to the new property not the existing (split the loans based on use of funds so the interest cost is apportioned correctly)
- Successful property investment is a numbers game (leave emotion out of it unless the property is for personal use)
- Seeking professional advice early and often with periodic annual reviews to monitor strategy (tax planning, structuring, finance and exit strategies).
