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Residential Investment

Negative & Positive Gearing

Borrowing funds to buy a property clearly involves an ongoing interest cost as well as the usual costs associated with ownership. Other costs might include allowable deductions such as council rates, managing agents’ fees, insurance, maintenance etc.

“Negative Gearing” exists where the ongoing interest cost plus any other allowable deductions exceed the rental income earned. This net running loss can be claimed as a deduction against other sources of taxable income earned in that financial year.

The key premise of “negative gearing” is the expectation of eventual profit through capital gains over the long term. Taking the view that real estate assets appreciate at certain average rates over time, the negatively geared property investor expects his/her property to grow whilst cost of owning the asset is taken care of or mostly offset by the rental income.

Negative gearing suits some more than others. Accordingly, it is prudent to obtain independent legal, financial and real estate advice before embarking on any property purchase or loan application.

“Positively geared” or cash flow positive properties are those that enjoy the opposite situation (i.e., where ongoing costs are less than rental income). Investors searching for that illusive positively geared property might often look in outer suburban and rural areas. However, there is often a trade-off. These higher-yielding properties will also traditionally coincide with low property price growth.

The key factors in assessing the positive cash flow of a particular property include not only the rental income and prevailing interest rates, but also allowable deductions and your own marginal tax rate.

Holistic Home Loans
18/12 Tyron Rd
Lindfield NSW 2070
Telephone: 1300 452 384