Ever since the housing demand started increasing at a rapid pace in Australia, it became very important for property owners to focus on positive and negative gearing investments of their property. It all depends on a person’s total income who owns a property or two in Australia. Whether you want to maintain a positive cash flow or put more focus on capital growth, it is up to your property and how you take care of it.
Positive gearing is more beneficial versus negative gearing is more beneficial is a debate which still needs to reach a conclusion. It remains unsettled which option is better for earning passive income. However, one thing that is certain is the fact that this decision is entirely based on the property investor’s earning goals. The location of your investment property matters a lot in both the cases.
Negative Gearing Your Property Investment VS Positive Gearing Your Property Investment?
Let’s just assume that you own two or more properties in Australia which are not under your use but you have the ownership. You do not need to precisely generate the passive income as such because you earn enough with your job hence you end up paying more expenses on your properties as compared to the rental income you receive. This is called negative gearing. If you pay more expenses such as taxes, loan repayments, management fees, maintenance etc. than you earn, your properties just might be negatively geared.
This is not such a bad thing because the major advantage of a negatively geared investment property is the capital growth it can generate which is believed to outweigh all the smaller financial losses. It is true that over time, the cost of an investment property increases (keeping the location in check) hence you end up with a big amount at the very end once you think about selling your property. Another thing which makes the negative gearing a better option is the fact that negative gearing property investment will start generating a positive cash flow over the course of a few years because the rents increase over time as well.
Negatively geared properties not only gain you a capital growth and subtle positive cash flow through a period of time but it is also very feasible for tenants as it becomes more affordable for them, thus; a great option for everyone. However, negative gearing your property investment in mostly believed to be a bad investment as compared to the positively geared properties because the disadvantages tend to outweigh the few advantages negative gearing offers.
Whereas, positive gearing your property investment proved to be a better option for people who are trying to earn passive income, since there are fewer disadvantages and more advantages such as creating a quicker positive cash flow for the owner as the rental income can eventually turn into a permanent supplementary source of income, having a lesser risk rate of going entirely broke in case of unemployment and loan repayments, being able to provide for a balanced portfolio for some investors and easily obtaining additional loans for bigger investments, etc.
But having its own cons, the positive gearing of your property can increase your tax rate just as your income, will take a lot of time for the long-term capital growth and the vacancy of your property i.e. no tenants, can be a problem. All of this highly dependable on the location of your property investment.
Without a doubt, it is certain that both of these options have their own pros and cons. Which one is a better option can only be decided according to one’s investment plans and future finance building strategies.