Understanding Negative Gearing vs Positive Cashflow Properties

If you are thinking of investing in property in Australia, you may have come across the terms negative gearing and positive cashflow. But what do they mean and how do they affect your investment strategy? In this blog post, we will explain the differences between negative gearing and positive cashflow properties, and the pros and cons of each approach.

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What is negative gearing?

Negative gearing is when the income you receive from your investment property is less than the expenses you incur to own and maintain it. This means you are making a loss on your property, which you can deduct from your taxable income. Negative gearing is a common strategy among property investors who are aiming for long-term capital growth, rather than immediate cash flow. They hope that the property will appreciate in value over time, and that the capital gain will outweigh the accumulated losses.

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What is positive cash flow?

Positive cashflow is when the income you receive from your investment property is more than the expenses you incur to own and maintain it. This means you are making a profit on your property, which you can use to pay off your mortgage, save for another deposit, or invest elsewhere. Positive cashflow is a common strategy among property investors who are looking for regular income, rather than capital growth. They prefer properties that have high rental yields, low maintenance costs, and stable demand.

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Pros and cons of negative gearing

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Some of the benefits of negative gearing are:

• You can reduce your tax liability by claiming your losses against your other income sources.
• You can benefit from capital appreciation if your property increases in value over time.
• You can leverage your borrowing power to buy more expensive properties that have higher growth potential.

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Some of the drawbacks of negative gearing are:

• You need to have enough cash flow to cover your losses until you sell your property or claim your tax refund.
• You are exposed to the risk of interest rate rises, vacancy periods, and market downturns that can increase your losses or reduce your capital gain.
• You may find it harder to build your portfolio, as your cash flow is tied up in your negatively geared properties.

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Pros and cons of positive cashflow

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Some of the benefits of positive cashflow are:

• You can generate passive income that can supplement your lifestyle or fund your other investments.
• You can pay off your mortgage faster and reduce your debt level.
• You can build your portfolio faster, as your cash flow can help you save for more deposits.

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Some of the drawbacks of positive cashflow are:

• You may have to pay more tax on your income, as you cannot claim any losses against your other income sources.
• You may miss out on capital growth if your property does not appreciate in value over time.
• You may have to compromise on the quality, location, or size of your property, as positive cashflow properties tend to be cheaper, older, or smaller.

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Conclusion: Which strategy is better?

There is no definitive answer to which strategy is better, as it depends on your personal goals, preferences, and circumstances. Some investors may prefer a mix of both strategies, as they can balance their cash flow and capital growth, and diversify their risk and return. Ultimately, the best strategy is the one that suits your financial situation and aligns with your long-term vision.

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