Positive gearing: a better option?
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
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.