Negative gearing vs positive gearing investment strategy - NAB

What is negative gearing?

Negative gearing is when the cost of owning an investment property is greater than the income it generates, resulting in a loss. These costs can include loan interest, rates, insurance, maintenance and other expenses. While this means you’re paying money out of pocket, the loss may be deducted from your taxable income, potentially reducing your tax bill. It’s also worth noting that tax benefits should be considered as part of the decision, not the sole reason for choosing this approach.

Example of negative gearing

Let’s say an investor buys an investment property that earns $20,000 a year in rent. However, interest and other expenses total $29,000, leaving an annual loss of $9,000. This loss can be offset against the investor’s taxable income, reducing the amount of tax they pay. After tax savings, the real out-of-pocket cost is lower.

Benefits, costs and considerations

Benefits

  • Investors may accept short-term losses in the expectation that capital growth will offset those losses in the long term.
  • Losses may be deducted from your taxable income, helping to reduce your tax bill.
  • Tax benefits can be an important factor when weighing up investment options.
  • Negative gearing can support a strategy focused on long-term wealth creation, rather than short-term income.

Costs and considerations

  • You’ll need sufficient cash flow to cover ongoing losses until tax time.
  • Ongoing out-of-pocket expenses can tie up cash, making it harder to grow your portfolio.
  • Higher levels of debt can leave you more exposed to interest rate rises.
  • If rates increase, you can’t always offset higher costs by raising rent.
  • There may be tax implications when you sell, such as capital gains tax.
  • There’s a risk of being forced to sell before your property’s value grows.

What is positive gearing?

Positive gearing, also known as positive cash flow, is when the income from an investment property exceeds all its expenses. After covering interest, maintenance, rates and insurance, the property generates a surplus rather than a loss. Rental yield plays an important role in positive gearing, with higher yield properties more likely to generate surplus income. However, higher cash flow can also mean higher tax, so it may be worth assessing both income and growth potential before buying.

Example of positive gearing

An investor purchases a property that earns $24,000 a year in rent. Their mortgage and other expenses total $12,000 annually, resulting in $12,000 of surplus income. This extra cash can be used to pay down the loan faster or saved towards another investment. While the additional income is taxable, the property generates profit from day one.

Benefits and costs to consider

Benefits

  • A positively geared property generates profit from day one.
  • Surplus income can be used to pay down the loan principal faster.
  • Positive cash flow can improve financial stability and borrowing capacity.
  • Extra cash flow may help you save for another deposit and continue building your portfolio.

Costs and considerations

  • Since you’re earning extra income, you’ll generally pay more tax.
  • Properties with higher yields may offer lower capital growth in some locations.
  • Rental income can change over time due to vacancies or market conditions.
  • After tax, the net benefit may be lower than the headline cash flow.

Common deductions for investment properties

Common types of deductible expenses can include:

  • Loan interest, where the loan is used to purchase or maintain the investment property

  • Property management and letting fees, including advertising for tenants

  • Repairs and maintenance, such as fixing existing fixtures or wear and tear

  • Council rates, water charges and strata fees

  • Insurance, including building and landlord insurance

  • Depreciation, which may apply to the building structure and certain fixtures over time

Can negative gearing work for you?

Negative gearing can work for some investors, depending on factors like cash flow, tax position, risk tolerance and how long you plan to hold the property. While potential tax benefits and capital growth may be part of the appeal, they need to be weighed against ongoing costs and the ability to manage periods of loss. When you’re ready, our home loan experts can help you explore borrowing options and loan structures to see how an investment property might fit into your plans.

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Terms and Conditions

The information contained in this article is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on this information, NAB recommends that you consider whether it is appropriate for your circumstances. NAB recommends that you seek independent legal, financial and taxation advice before acting on any information in this article.

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