27 May 2009

Negative versus positive gearing – what makes more cents”?”

Even with an uncertain economy, rising unemployment and the possibility of interest rates rising, rental yields are still expected to continue to increase in most capital cities.

Whilst rents have increased, property prices have remained stable (even declining in some cities) due to the softening economic conditions. This has resulted in an increased rental yield on most properties and, when combined with low interest rates, has created the possibility of a positively geared investment property.

Once you have researched your future property, you will then need to decide on the gearing strategy that best suits you. This will be determined by your financial circumstances, retirement strategy, the level of your deposit, equity available, surplus monthly cashflow (income less expenses) and your acceptable level of risk.

These considerations will clarify whether negative gearing or positive gearing strategies are most appropriate to your situation. So, should you have positively or negatively geared property investments?

Positively geared properties are when the rental return is higher than your loan repayments and outgoings.

Positive cash flow properties are self funding and are considered to be a conservative investment strategy that provides an income with exposure to the prospect of capital growth.

Bear in mind that with positive gearing there is the potential that tax will be payable on the net income (after the consideration of depreciation and other tax deductions).

Negatively geared properties are when the rental return is less than your loan repayments and outgoings (placing you in an income loss position). There is however the underlying expectation that the accumulated losses will be more than offset by the capital growth on the property.

In this circumstance the rental return is not considered as important in the decision process.

The key benefit associated with negative gearing is that the loss associated with the property ownership can be offset against other income earned, reducing your assessable tax income, thereby reducing your tax payable.

Ultimately most investors will aim to be positively geared in the long run.

Call 133 144 if you would like help to decide which gearing option is best suited to your individual circumstances.

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