When a property is negatively geared, it means the cost of owning it is more than the income it generates. Because this strategy returns a loss, it can seem risky – but there are other benefits that can add up in your favour overall. For example, you can deduct the loss from your taxable income.
Advantages of negative gearing
While you’re making a loss, your property’s capital value is (hopefully) growing. Negatively geared investors are banking on their overall loss being offset by their property's potential capital appreciation. Keep in mind, there may be tax implications (like capital gains tax) that you’ll need to factor in if/when you sell.
Saving tax shouldn't be the only reason for choosing an investment strategy, but it’s definitely worth factoring in as you weigh up the options.
Disadvantages of negative gearing
You’ll need to have enough cash flow to cover your losses until tax time comes around each year. Running negatively geared investment properties can also make it harder to build your portfolio, since your extra cash will be tied up.
If you’re more highly geared (more deeply in debt) you'll be vulnerable to rate rises too. To find out more about how it all works, read through our negative gearing case study.
Choosing to negatively gear
Before you negatively gear a property, make sure you can afford the ongoing out-of-pocket expenses. If rates go up, you can’t offset the added expense by simply increasing your rent – and you don’t want to be forced to sell your investment property before your capital grows.
Speak to an expert
It’s always a good idea to run your plans by an accountant or financial adviser before settling on an investment strategy.