Do you like the idea of positively or negatively geared property?
Do you want cash flow or capital gains?
Or are you looking for a combination of the two?
Every property investor I meet has their own opinion on the pros and cons of positively and negatively geared property.
In todays article we take a look at both strategies so you can decide for yourself.
What is a positively geared property?
A positively geared property is one where the rental income from the property covers all of the on-going costs (interest, council rates, body corporate, property management fees, etc) associated with that property.
We recently wrote an article where we looked at how to identify positively geared and cash flow positive properties.
What is a cash flow positive property?
A cash flow positive property is one where the rental income, tax deductions and depreciation cover the on-going costs (interest, council rates, body corporate, property management fees, etc) associated with that property.
What’s the major difference between a positively geared and cash flow positive property?
A positively geared property will leave an investor with extra money in their pocket at the end of the week, before taking into account tax deductions and depreciation.
A cash flow positive property will leave an investor with a deficit in their pocket at the end of each week, but will leave the investor in a cash flow positive position at the end of the financial year.
What’s a negatively geared property?
A negatively geared property is one where the rental income, tax deductions and depreciation do not cover the on-going costs (interest, council rates, body corporate, property management fees, etc) associated with that property.
A negatively geared property will leave an investor with a deficit in their pocket at the end of each week and the end of the financial year.
What are the pros and cons of positively geared and negatively geared property?
Pros and cons of investing in positively geared property
|Create cash flow||The income you earn on a positively geared property is taxable|
|Increase your income||Positively geared properties are often located in regional areas, which commonly (but not always) see slower rates of capital growth|
|Reduce your exposure to income, interest rate and market fluctuations||They can be sensitive to economic cycles|
|You are less likely to sell in a pressure situation||Potentially higher costs associated with maintenance and tenancy problems due to socio-economic factors|
|Can be used to balance a portfolio||You will generally achieve a higher rate of growth over the longer term by investing in inner city properties|
|Can increase your serviceability and attractiveness to lenders|
|Typically offer investors a lower entry point than inner city properties|
|You can use the surplus cash flow to pay down principle or to invest in additional properties|
|Can achieve some capital growth based on the demand for higher yielding properties|
Take a look at an example of a positively geared property here:
Pros and cons of investing in negatively geared property
|Tax deductions and depreciation||Cash flow issues as you begin to grow your property portfolio|
|Assuming the strategy goes to plan, the capital gains from the property will eventually outweigh the costs of buying, holding and maintaining the property||Serviceability issues as you grow your property portfolio|
|You will generally achieve a higher rate of growth over the longer term by investing in inner city properties||You will need to maintain a stricter budget|
|You are generally investing in ‘safer’ areas||Capital gains tax|
|Capital gains||It’s a longer term wealth creation strategy which means if your circumstances change and a sale is necessary the numbers may not work out in your favour if the market if flat|
|You are making an assumption that that the property market will continue to rise in value|
Do you prefer to invest in positively geared or negatively geared property?
We would love to hear your thoughts and approach to investing in the comments section below.
The information contained in this blog is for informational purposes only. No responsibility can be taken for any results or outcomes resulting from the use of this material. While every attempt has been made to provide information that is both accurate and effective, the author does not assume any responsibility for the accuracy or use/misuse of this information.
I am not a lawyer, accountant or financial planner. Any legal or financial advice that I give is my opinion based on my own experience. You should always seek the advice of a professional before acting on something that I have published or recommended.