Financial Advice For Real People! What Kind of Investment Are You?

Finding the right type of investment to suit your needs can be incredibly confusing and perplexing.

And when it comes to property investment finding the right property is only part of the dilemma. Decisions also need to be made on how to gear that property to maximise profit.

So, what’s it to be? Negative or positive? What are the benefits and why choose one over the other?

First, we need a clear understanding as to what each means.

It’s not difficult to grasp. If you are in the positive, it generally means the rent you receive from your tenants covers the cost of your ongoing payments which might include your loan, maintenance, agent’s fees and rates.

If you are in the negative it simply means the opposite. The rent you receive does not adequately cover all the fees you have to pay out.

So, on the surface it seems to make sense to positively gear your property. Why on earth would you want to be out of pocket, when buying a property is such a huge expense anyway?

Well there are advantages and disadvantages to both forms of property gearing.

If you positively gear, you reap the benefits of having a little extra cash which you can direct towards other projects and which, in turn, can mean you are more attractive to potential lenders.

It also means there is less risk if you lose your job, for example, and won’t mean you’ll have to sell the property.

Positive gearing is all about increased cash flow and that can never be a bad thing.

But believe it or not, there are positives to the negative!

These include tax deductions on the expenses you make for a negatively geared property, refunded by the Australian Tax Office, and capital growth upon sale.

And, yes … there are negatives to the positive!

Any income earned off a positively geared property is taxable and in general there is slower growth as often these properties can be found in regional areas where house prices don’t move as quickly as capital cities. But it also means the areas these homes are situated can be subject to the peculiarities of a particular industry where employment may boom, only to go bust. The mining industry is a good example of this. In addition, properties that can be positively geared can be difficult to find.

Compounding the negatives on negative gearing are factors such as being able to afford the shortfall in the rental income to be able to pay all those expenses, and, of course, losing your job will put the property at risk of having to be sold to pay the loan back – unless you have income insurance.

And if the property is sold, you will obviously be taxed on any capital gain.

When negative gearing a property, it is usually accepted that holding on to that house is at least a 10-year strategy to ensure prices have moved favourably forward.

So, which type of investment strategy is best for you? Neither is better than the other and it’s clear they both have their pros and cons. The smart move is to talk to a good Financial Adviser about the right choice for your individual needs.

If you would like advice on property investment, contact us today.