What is the Difference Between Negative and Positive Gearing?
🆚 Go to Comparative Table 🆚The difference between negative and positive gearing lies in the relationship between the rental income generated by an investment property and the expenses associated with it. Gearing refers to borrowing money to invest, and both positive and negative gearing involve different levels of risk and potential returns.
Positive Gearing:
- The rental income is more than the interest payments and outgoings, such as maintenance and repair costs.
- Generates a positive cash flow, making it generally considered less risky.
- Suitable for investors looking for immediate returns and steady income.
- Properties that are positively geared often have lower capital growth potential compared to negatively geared properties.
Negative Gearing:
- The rental income is less than the interest payments and outgoings.
- Requires cash flow to cover losses until tax time each year.
- Involves more risk due to its dependence on long-term property appreciation.
- Can provide tax savings by deducting some costs from taxable income.
- May be suitable for investors with a longer investment timeline, as the property may eventually offer both rental income and capital growth.
Both strategies have their place, and the right option will depend on an investor's financial circumstances, investment goals, and risk tolerance. It is essential to develop a thorough understanding of how each gearing strategy works, including potential deductions and the alignment of the property investment with specific strategies to achieve desired outcomes.
Comparative Table: Negative vs Positive Gearing
Here is a table comparing the differences between negative and positive gearing:
| Feature | Negative Gearing | Positive Gearing |
|---|---|---|
| Rental Income | Less than the cost of owning and maintaining the property | More than the cost of owning and maintaining the property |
| Cash Flow | Negative cash flow, as the expenses are more than the rental income | Positive cash flow, as the rental income is more than the expenses |
| Tax Benefits | Tax deductions due to the loss from investment falling below the investment expenses | No tax deduction feature |
| Risk Level | Higher risk due to dependence on long-term property appreciation | Lower risk as it provides immediate returns |
| Investment Timeline | Preferred by investors with a longer investment timeline | Preferred by investors with a shorter investment timeline |
| Capital Growth Potential | Lower capital growth potential | Higher capital growth potential |
| Financial Situation | Suitable for investors seeking tax benefits and willing to take on higher risk | Suitable for investors seeking steady income and lower risk |
It is essential to consider your financial circumstances, investment goals, and risk tolerance when deciding between negative and positive gearing. The right strategy will depend on your specific situation and objectives.
- Gearing vs Leverage
- Positive vs Negative Control
- Positive vs Negative Catalyst
- Positive Feedback vs Negative Feedback
- Positive Correlation vs Negative Correlation
- Positive vs Negative Externalities
- Positive vs Negative Tropism
- Positive vs Negative Feedback Loops
- Positive vs Negative Reinforcement
- Positive vs Negative Gene Regulation
- Positive Punishment vs Negative Punishment
- Debt vs Equity
- Negative vs Realism
- Positive Economics vs Normative Economics
- Positive vs Negative Supercoiling of DNA
- Gross Working Capital vs Net working Capital
- Capital Gains vs Income
- Lending vs Borrowing
- Net Profit vs Gross Profit