When investing in property, one key decision is choosing between positive gearing and negative gearing. Both strategies impact your portfolio differently. Positive gearing generates income, while negative gearing may offer tax benefits. But which one is better for long-term success? Let’s compare both options and explore why positive gearing often leads to more sustainable wealth.
What is Negative Gearing?
Negative gearing happens when your property costs exceed the rental income. This means you’re making a loss. However, you can offset this loss against your taxable income, reducing the amount of tax you pay.
Many investors use negative gearing to lower their tax bills. They expect the property’s value to grow over time, making the strategy worthwhile. However, this approach relies on market appreciation rather than immediate financial returns.
What is Positive Gearing?
Positive gearing, on the other hand, occurs when the income from a property exceeds the costs associated with owning and maintaining it. In simple terms, you’re making a profit. This positive cash flow can be reinvested, used to pay off the mortgage faster, or support further investments in your property portfolio.
While positive gearing doesn’t provide the same tax advantages as negative gearing, it offers a steady stream of income. It also gives you more control over your property’s financial performance without relying heavily on tax deductions.
The Key Differences and Why Positive Gearing Often Wins
In terms of building a property portfolio, many seasoned investors lean towards positively geared properties. Here’s why:
Better Serviceability for Future Investments
A positively geared property means you have a consistent income stream. Banks look at your serviceability when approving loans for new properties, and having a property that generates income increases your borrowing capacity. This is crucial when you’re looking to grow your portfolio.
Minimizing Reliance on Tax Deductions with Positive Gearing
While negative gearing may reduce your tax bill, it doesn’t actually contribute to your property’s growth. Over time, relying too heavily on negative gearing can hurt your ability to borrow and invest in more properties. On the other hand, positively geared properties let you focus on creating wealth rather than constantly offsetting losses.
Long-Term Stability with Positive Gearing
With positive gearing, your property takes care of itself. The rental income covers the mortgage, and you get to keep the profits. This reduces the strain on your personal finances, making it easier to sustain the property and avoid running out of serviceability in the long term.
Building Equity Faster
The money you’re making from a positively geared property can be reinvested, helping you build equity quicker. This, in turn, helps you acquire more properties in the future, making it a more sustainable strategy for long-term property investment.
The Case for Positively Geared Properties
At Quantum Buyers Agents, we believe that, as often as possible, it’s better to keep properties positively geared. The key is to identify properties that will not only provide a steady stream of income but also appreciate in value over time.
As an investor, the goal is to create a balanced portfolio. You want to ensure that the properties you choose will give you flexibility in the future to acquire more without stretching your finances too thin. While negatively geared properties may help in the short term with tax benefits, positively geared properties provide a better foundation for growth.
For more information on how positive gearing can help you build your portfolio, check out this article on positive gearing from the Australian Taxation Office
Conclusion: Finding the Right Balance
The debate between positive and negative gearing is one that divides many investors. Ultimately, the best strategy is the one that aligns with your investment goals and personal circumstances. For those looking to build a long-term, sustainable property portfolio, Quantum Buyers Agents recommends considering positively geared properties as part of a broader strategy to ensure that you can continue to grow your portfolio without overextending yourself financially.
To learn more about how you can leverage property investments to grow your wealth, visit us at Quantum Buyers Agents. Our expert team can help guide you through every step of the property buying process, ensuring you make informed and strategic decisions that suit your financial goals.
