From Money magazine, October 2003

Negative gearing is a concept familiar to most property investors. But perhaps it’s better to forget about tax breaks and go for bigger rental returns. This is called “positive gearing”. Chris Walker explains.

The attraction of negative gearing – where the property’s running costs exceed the rental income – is that ongoing losses are tax deductible. This reduces your tax bill, effectively boosting returns. But investment properties can also be positively geared.

In brief

• Positive gearing is where the rental returns are greater than the outgoings (including interest on the loan). In addition to potentially high rental yields, fans of positive gearing argue that the cash flow from these properties can be used to fund a whole string of investment properties.
   
• Few of us would willingly tip our money into an investment that continually makes a loss, yet the proponents of positive gearing say that this is exactly what negative gearing can involve.
   
• Figures released by the Australian Bureau of Statistics (ABS Cat. 8711) show that in 1995-96, only around 15% of investment properties funded by a mortgage turned a profit – and even among unencumbered properties, only 60% were profitable.
   
• What continues to attract investors to negatively geared properties, apart from the tax breaks, is the prospect of capital growth. But the substantial transaction costs associated with real estate mean that the property often needs to rise in value substantially before the owner is in the black. And in the meantime, the rent return is often low.

What Money Magazine says

As a general rule of thumb – and the current property boom has proved there are exceptions – investment properties can be expected to earn either a good rental return - such as those generated via positive gearing - or capital returns. Only rarely does a property yield both.

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