Key takeaways
- Gearing simply means borrowing to invest; the question is whether the property runs at a profit or a loss each year.
- A negatively geared property costs more to hold than it earns, and the loss can usually be claimed against your income.
- A positively geared property earns more than it costs, putting cash in your pocket but adding to your taxable income.
- Neither is automatically better; it depends on your income, cash flow and whether you are chasing growth or income.
Negative and positive gearing get talked about like they are investment strategies in themselves, but really they just describe whether a property makes or loses money year to year. Andy has been broking in WA since 2000, and he helps investors understand which suits their situation rather than chasing whichever one sounds clever at a barbecue.
What Gearing Means
Gearing is just borrowing to invest. Whether your property is negatively or positively geared comes down to one comparison: does the rent cover the costs of holding it, the loan interest, rates, insurance, management and maintenance, or not?
Negative Gearing
A property is negatively geared when it costs more to hold than it earns in rent. You are out of pocket each year, but that loss can usually be claimed against your other income, reducing your tax. The strategy relies on the property growing in value over time to more than make up for the yearly shortfall. It tends to suit higher-income earners who can comfortably cover the gap and are investing for long-term capital growth.
Positive Gearing
A property is positively geared when the rent more than covers the costs, so it puts cash in your pocket each year. That extra income is taxable, but you are cash-flow positive from day one. This tends to suit investors who want the property to support itself, or who are building a portfolio and need each property to stand on its own feet.
| Negative gearing | Positive gearing | |
|---|---|---|
| Annual cash flow | Out of pocket | Cash in pocket |
| Tax effect | Loss reduces your taxable income | Income adds to your taxable income |
| Main goal | Long-term capital growth | Income and self-supporting property |
| Often suits | Higher earners, growth focus | Cash-flow focus, portfolio builders |
Which One Is Better?
Neither is automatically better. The right approach depends on your income, your cash flow, your risk appetite and whether you are chasing growth or income. A negatively geared growth property and a positively geared income property can both be sensible, the trap is picking a label first and forcing your situation to fit it.
How the Loan Structure Plays In
How your loan is set up, interest-only versus principal and interest, offset, the rate, all affects your cash flow and therefore your gearing position. This is where the finance and the strategy meet. Always confirm the tax detail with your accountant, but get the loan structure right with someone who understands investing. Read investment loan versus owner-occupier loan differences for the finance side.
How Andy Helps
Andy looks at your whole position and structures the loan to suit your gearing strategy and cash flow, working alongside your accountant on the tax. See the investment home loans page and get in touch.
Gearing Questions
Is negative gearing better than positive gearing?
Neither is automatically better. Negative gearing suits a growth focus and higher earners; positive gearing suits a cash-flow focus. Andy can talk through which fits your situation.
Can I claim a negatively geared loss on tax?
Generally, yes, the annual loss can usually be claimed against your other income. Confirm the detail with your accountant, and Andy will structure the loan to suit.
Does my loan affect whether a property is geared positively or negatively?
Yes. The rate, repayment type and features all affect your holding costs and cash flow. Getting the loan structure right is part of the strategy.
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