The basics of property gearing: What you need to know

Sydney-property-values-are-on-the-rise-_16000816_800510274_0_14085406_300Property investment can be a confusing environment to try and break into, and with a multitude of jargons and terms to understand, you’d be forgiven for feeling slightly overwhelmed. Of course, the ultimate goal for any investment is to earn a profit.

There are a number of ways you can make an investment property work for you. But one of the more confusing aspects of investment in Australia is wrapping your head around gearing, and deciding which option is best suited.

Negative Gearing

An investment that is negatively geared is one where the income earned from the property is less than the expenses associated with the property.

For example, if you have a property with a mortgage of $500 per week, but the weekly rental yield only comes to $400, there will be a shortfall of $100. This is usually funded out of your own pocket.

You may be wondering why anyone would want to choose this strategy, but the tax implications of such an investment can make it fairly attractive to property investors.

The Australian Taxation Office allows investors to claim a number of tax deductions for costs associated with the property, therefore reducing the amount of taxable income for the financial year.

Some of the deductions you could be eligible for with a negatively geared property include the interest on your loan, letting fees for real estate agents and the depreciation of fixtures within the property.

This type of gearing is best utilised for properties that will experience low rental yields but high capital gains. Often, negatively geared properties are held for a short period of time and are usually sold once capital growth has reached a good level.

Positive Gearing

On the flip side, a positively geared property is one where the income earned outweighs the expenses for your investment. These situations occur when the rental income is higher than expenses, due to high rental yields, effectively putting cash in your pocket from the get go.

This gives you the ability to begin to reap the rewards of your investment through the rental income that is received. Furthermore, you can increase your overall borrowing capacity due to the higher rate of income you have.

These properties often possess strong rental yields, but have a lower level of capital growth.

Mining property is a great example of a positively geared property, as they can be cheap to buy but median rents can be quite high. This results in a higher level of income over expenses.

In order to understand which of these investment strategies could work for you, get in contact with a financial expert to discuss your real estate plans, including your long term goals, and gain their insight before making a commitment.

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