What It Means & How It Can Help You Unlock Financial Freedom
Positive and negative gearing are terms that get thrown around a lot in the investment world, and we find many individuals wondering if positive gearing is better than negative gearing when it comes to their investment property.
At AllianceCorp, we want to work with you to create tailored property investment strategies that grow your wealth and unlock the potential for financial freedom. In this blog post, we will explore both positive and negative gearing so you can ensure you’re getting the most out of your investment property!
What is positive gearing?
In layman’s terms, a positively geared property is one where your incomings – like your rental income – are higher than your outgoing expenses – think mortgage repayments, repairs, council fees.
This positive gearing results in a positive cash flow for your investment property before tax.
So, what are the advantages of positive gearing?
There are many advantages of positive gearing, these can include increased purchasing power, more cash in your pocket and you can make a profit without having to rely on capital growth.
Increased purchasing power:
When you have an increased cash flow from existing investment properties, you can use this to further expand your investments, increase your property portfolio and further build your wealth.
Who doesn’t love some extra cash in their pocket? When you have an investment property that is fully covered by rental income you can immediately begin experiencing positive cash flow so there’s more cash in hand for you!
Profit without capital growth:
When you’re already making money from your investment property, you don’t need to rely on an increase in property prices to see a profit from your investment, you’re already making one!
Things to remember for positive gearing
There are a few things you should keep in mind when it comes to investing, especially if you’re relying on your investment to be positively geared to make a profit. Here are some of those factors you should keep in mind:
Taxable income: Any money you make from a positively geared property will be considered an additional income and thus will be taxable.
More uncommon: Having a positively geared property may seem too good to be true for many property investors, and that’s because it often is.
What is negative gearing?
Negative gearing is the complete opposite of positive gearing. This means that the rental income received is less than the investment property’s overall outgoing costs. Now this might seem crazy for an investor to seemingly lose money, but there are a myriad of advantages to negative gearing.
Advantages of negative gearing
Whilst it may seem counterintuitive, there are many benefits to having a negatively geared investment property. These can include factors like lower interest rates, a reduced taxable income and the ability to focus on capital growth.
Lower interest rates: It’s no secret that interest rates have been fluctuating a lot over the past few years. But the benefit of negative gearing is that lower interest rates mean investors will only incur small losses on negatively geared properties, making it easier for you to hold onto your assets.
Reduced taxable income: When your property is negatively geared, you can claim this on your tax return. By reducing your taxable income you, in turn, reduce the amount of payable tax. Many investors chose to negatively gear their properties for this reason and they achieve strong capital gains over time.
Focus on capital growth: If you’re considering negative gearing, one major benefit is the ability to focus on overall capital growth above accumulated losses when the investment property is sold. Short term, this means that investors are able to save on tax whilst also benefiting from the long term capital growth of their investment property.
Factors to consider for negative gearing
There are a few things that you should keep in mind if you are considering negatively gearing your property. These factors include:
Maintain a buffer: If you have a negatively geared property, a high-income cash reserve is often needed to ensure you can hold onto the property for long enough to achieve the long term capital growth you’re after.
Buying power: Negatively geared properties may make it more difficult to increase your investment portfolio as there is no incoming cash flow from your existing property.
How can AllianceCorp help?
At AllianceCorp, we have a dedicated team of experienced professionals who are ready to give you all the advice you need to generate wealth through investments. Book a free consultation with us today to find out how negative or positive gearing can work best for you and get yourself on the way to financial freedom!
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