Then term “negative gearing” is often mentioned in conversations about investing. Generally it’s in the context of investing in property, but it can apply to any investment.
Positive gearing is less often mentioned but no less relevant in an investment conversation. So what’s the difference?
NEGATIVE GEARING is where you borrow money to invest and the income from the investment (like property rent or share dividends) is more than the costs of the investment (think loan interest, fees, maintenance). The costs are higher than the income so there is a “negative” cash flow position. In other words, a loss is being made on the investment.
Investors can claim a tax deduction for the loss, but it still costs money to hold the investment. The long term aim is for the capital growth of the investment to be higher than the losses incurred.
POSITIVE GEARING is where money is borrowed to invest and the income from the investment is MORE than the cost of the investment.
If you’re positively geared you’ll have extra money coming in but will have to pay tax on that income at tax time. Despite the tax a profit is still being made on the investment.
Think of two properties.
If one has rental income of $26,000 per annum and has overall expenses of $30,000 (interest $22,000, maintenance $5,000 and other costs of $3,000) it will have a loss of $4,000. It is negatively geared.
If the other has rental income of $35,000 per annum (perhaps it has a granny flat earning extra rent) and has overall expenses of $30,000 (as above) then it is positively geared.
Neither is necessarily better than the other because each and every investment and investor is different. A negatively geared investment may achieve higher capital growth over time than a positively geared investment (or it may not!). It’s important to get sound, qualified advice before borrowing money to invest in anything.
If you would like to discuss your options for positive or negative gearing, give the team at Steve May a call and start a conversation today.
You need to consider with your financial planner (or adviser), your objectives, financial situation and your particular needs prior to making an investment decision. Sensibly Pty Ltd and its authorised representatives (or credit representatives) do not accept liability for any errors or omissions of information supplied on this website
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Nick Shanley, Steve May and Luke Styles are Authorised Representatives of Sensibly Pty Ltd (AFSL 533923)