![]() Or you might use the extra cash to pay down the principal on your mortgage. ![]() With a higher income, you can start putting money aside for another deposit – and continue to build your portfolio that way. Having a positive cash flow means you’re likely to be making a profit from day one. ![]() What is positive gearing?Īlso known as ‘positive cash flow’, positive gearing is the traditional way of making money from your investment properties.īasically, you just add up all your expenses (things like interest, maintenance, rates and insurance), and if the rent you’re receiving for the property is more than you’re spending on it, you’re generating positive cash flow. 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. Costs of negative gearingīefore you negatively gear a property, make sure you can afford the ongoing out-of-pocket expenses. To find out more about how it all works, read through our negative gearing case study. If you’re more highly geared (more deeply in debt) you'll be vulnerable to rate rises too. Running negatively geared investment properties can also make it harder to build your portfolio, since your extra cash will be tied up. You’ll need to have enough cash flow to cover your losses until tax time comes around each year. 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. Keep in mind, there may be tax implications (like capital gains tax) that you’ll need to factor in if or when you sell. Negatively geared investors are banking on their overall loss being offset by their property's potential capital appreciation. While you’re making a loss, your property’s capital value may be growing. For example, you can deduct some of your costs from your taxable income and potentially benefit from capital appreciation. Because this strategy returns a loss, it can seem risky – but there are other benefits that can add up in your favour overall. When a property is negatively geared, it means the cost of owning it is more than the income it generates.
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