A crucial part of any property investment strategy is deciding how your ideal property will be geared: Positively, negatively or neutrally? While this might sound like gobbledegook to a first time property investor, understanding the differences is critical to your success.
Positive gearing
A positively geared piece of real estate is also known as a cash flow positive property. What that means is that the income you receive from the property - such as through rent or depreciation tax offsets - is greater than the total expenses associated with it, leaving you requiring to pay tax on your net income. Some of these expenses include:
- the interest on your home loan
- rates
- maintenance and repairs
- property management fees
A positively geared property is useful for those who want to earn a steady, second revenue stream from their investment, rather than simply quickly flipping it, or selling it for a profit in the long run. With a positively geared property, you can not only progressively grow your wealth over time, but potentially pay off your loan quicker.
Negative gearing
For those who are hoping to make a more long-term profit, negative gearing can be the ideal approach to investing in property. With a negatively geared property, the annual expenses outweigh the income generated, leaving the owner with a net loss.
This loss can then be offset against the rest of your assessable income, such as your wages or salary, allowing you to reduce the tax on your total income. The savings you can make depend on the tax bracket you ordinarily fall in.
Neutral gearing
As the name indicates, neutral gearing is when the income and expenses associated with a property are equal, leaving you with neither an advantage nor disadvantage when it comes to tax. This can be helpful for those funding a property portfolio through an SMSF, as it won't take away from the fund's wealth.
Deciding which of the three options you want to go for all depends on your particular strategy. DPN has a proven five-step property selection methodology that can help take the guesswork out of the process, minimise risk and help ensure you choose the right property for you.
