Negative and Positive gearing explained.

Negative and Positive gearing explained. What does all of this mean?

How do they differ and which is right for your investment property? Let’s find out.

Positive Gearing
When your total rental income is MORE than the cost of owning and managing the investment property (loan repayments, interest, maintenance, management fees, etc). To put it simply, it puts money into your pocket.

For example:

Your investment property brings in $550 a week in rental income and your property expenses are $490 a week. This means you make $60 a week from your investment.

Negative gearing
Opposite to positive gearing, it’s when your total rental income is LESS than the cost of owning and managing the investment property (loan repayments, interest, maintenance, management fees, etc). Leaving you to make up the difference in payments.

For example:

Your investment property brings in $550 a week in rental income and your property expenses are $570 a week. So you need to put forward an additional $20 each week to cover the costs.

So which is right for you?
Positive gearing allows you to have an increased income and generally won’t put you out of pocket. However it’s important to note you may be taxed on any additional cash from your investment.

With negative gearing you can claim tax deductions on expenses related to owning your investment property. The capital growth on the property will also eventually outweigh the expenses as the property grows in value overtime.

There are pro’s and cons for both situations so it’s important to get some advice on which one is better suited to you and your needs.

This article was supplied by Bruce Patten, International Mortgage Broker of the Year 2006 – 2017.  Bruce is always on hand to answer any questions you may have about loans or anything else around the loan process. Feel free to get in touch with him anytime via phone (021 661 114) or email (bruce.patten@loanmarket.co.nz).