Positive gearing occurs when you receive more in rental income from your tenants than what you pay on expenses such as loan interest, management fees, property maintenance, council rates, and so on.
Negative gearing occurs when the rental income you receive is less than the total costs involved in owning that investment property. If you’re looking for more information about negative vs positive gearing you may check this out.
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The main advantages of positive gearing are:
1.Increased income – You’re not out of pocket, plus you can use the extra cash to pay off your PPOR (home) sooner.
2.Less risk – If your income circumstances change (e.g. loss of job), you are less likely to need to sell under pressure and potentially unfavorable conditions.
The main advantages of negative gearing are:
1.Tax Deductions – This allows you to claim the rental shortfall and ultimately reduce your taxable income.
2.Capital Growth – The capital returns from the property will eventually outweigh the borrowing levels and costs to create wealth for you at the sale, or better still to leverage against the growth to buy more property and create more wealth.
What’s better? Positive or Negative?
It all depends on what stage in your life cycle you are at. Once you are retired, your primary goal will be to generate as much income (cash flow) from your investments as possible to enjoy more of the good life once retired.