Before outlining the pros and cons of both negative and positive gearing, I have defined the terms ‘gearing’ and ‘cash-flow’ at the bottom of this article, as these terms may differ in different countries and investment vehicles. Also different investors may also have slightly different views on the terms so it’s important to clarify for this article.
What is Negative Gearing?
A negatively geared property is an income loss making investment.
It is when the costs of holding the property (such as water, rates, fees and repayments) exceed the amount of income you receive in rent and you are left with a cost at the end of the month that you need to pay for out of your own pocket.
So why would anyone want to lose money in an investment?
Well there are a number of reasons:
- You are seeking a big increase in the value of the property and have decided that the holding costs are worth it to achieve this result.
- You believe that the rental return will grow over time, exceeding the property’s holding costs and eventually becoming positive.
- You have a high taxable income and be using the negative gearing to reduce their tax bill.
Positive Gearing / Cash-flow
A positively geared property is where your cash-flow from the incoming rent and taxable benefits exceed the costs for holding the property, therefore putting money in your pocket and making it positive.
Check out our infographic explaining the pros and cons of positive gearing.
So then, if positive gearing is so great, why don’t more people do it?
Up until recently, the majority of positively geared investment properties were located in small isolated mining towns that hit the jackpot when the mining boom came to town.
Some areas such as Moranbah QLD, reported huge increases of up to $2000! per week for small houses!
Domain.com.au reports that since the mining bust though, some rents have fallen from $2000 to $180 per week in Moranbah and values have fallen by over 50%! Ouch.
Courtesy of: Williams Real Estate Moranbah
However, innovative new duplexes and dual occupancy’s make it possible to have positively geared investment properties around capital cities that produce higher than average income and solid capital growth for the long term.
So how much do they cost to build and hold?
To answer this question we have assembled the cash-flow comparison chart below that breaks down building costs, holding expenses and cash-flow from a dual occupancy vs a standard investment property.
A Positive Cash-flow dual occupancy verses a standard 4 bedroom house
As you can see, the above cash-flow shows a difference of $124.13 per week. We have found cash-flows such as this and higher common for dual occupancy properties.
Additionally, property building costs for a dual occupancy is only $70,000 more than a standard investment property.
With such a positive cash-flow return, this takes out some of the risk associated with negatively geared properties when interest rates increase.
Additionally, your vacancy risk is reduced, as it is extremely rare that both sides of a dual occupancy property will be vacated at the same time.
For a further confidential discussion about dual occupancy properties, contact us today.
Definitions: ‘Gearing’: Gearing refers to the borrowing of funds towards the purchase of a property. A property investment can be negatively geared, meaning that the costs for the funds borrowed and property expenses are greater than the revenue the property provides. Or Positively geared, meaning that the income from the property is greater than costs for the funds borrowed and property expenses. ‘Cash-flow’: takes into account the total income produced (ie Rent), and the total outgoings (Interest, rates, management fees, expenses). The total cash-flow situation refers to the after-tax cash-flow of the investment. For example: a property may be negatively geared for taxation purposes, and once the additional tax advantages of this are taken into account, the final cash-flow for the property may be positive. Therefore, a negatively geared property can have a positive cash-flow.