How Does Positive Gearing Work?

What is positive gearing? 

In the simplest terms, a positively geared property is one where the rental income is greater than any of the associated costs. That is, after paying the mortgage, strata fees, maintenance, and anything else the property needs, there’s still rent money left over. 

What’s the difference between positive and negative gearing? 

Positive gearing is when the rental income is greater than the total costs associated with the investment property. It follows that negative gearing is the opposite – when the total costs associated with the investment property are greater than the rental income.  

You can think about it like this: positive gearing means you have money left over in your pocket. Negative gearing means you’ll have to put money from your own pocket into the property, even after receiving the rent.  

Positive gearing sounds better, right? Well, it might. The amount that an investment property is positively or negatively geared is offset against your taxable income, so a negatively geared property would reduce the income tax you pay. People might also negatively gear a property and take the loss strategically, with the expectation that they’ll make the money back when they resell the property.  

What are the potential advantages and challenges of positive gearing? 

As with any investment, it’s important to weigh up the possible advantages and disadvantages for your specific goals, needs, and financial circumstances. 

Some of the potential benefits of positive gearing include:

• Passive income: a positively geared property can provide you with a steady income stream as well as future capital gains (reselling the property for more than you bought it) if the property increases in value over time.
• Less cash flow risk: because a positively geared property pays for itself, there’s no need to use other income to make your mortgage payments or consider selling under pressure if your financial circumstances change.
• Easier borrowing: with additional positive cash flow boosting your income, it could be easier to secure a loan. 

However, there are a few things you might need to account for:

• The income is taxable: just like the wages you receive from your job, you’ll need to pay taxes on any income your property generates.
• The up-front cost can be higher: to make a profit on rental income, you usually need a larger deposit to allow for a smaller mortgage.
• The property can be more volatile: it could be easier to positively gear a property that’s cheaper to purchase. As cheaper properties are often located in areas that might not experience the same property value growth as more expensive areas, the value of your investment could be hard to predict. 

Helpful tip:

If you’re playing the investment game, you might find advantages in both positively and negatively geared properties, depending on your other assets and your financial goals. First, it’s a good idea to chat with a financial advisor or an accountant to develop a gearing strategy. Then, you can take your strategy to a mortgage broker such as Lendi for help finding a suitable loan.

Debbie Shankar

Former Group Content Manager, Lendi

How does tax work on positively geared investment properties? 

To give you a sense of how positive gearing can work, and the tax implications involved, let’s look at an example. 

Our fictional heroine Amina decides to buy a property in a regional area with low vacancy rates and high rental yields. 

• Purchase price – $650,000
• Deposit – $300,000
• Loan – $350,000 over 30 years
• Interest rate – Fixed rate of 6.8% for the first three years 

Amina rents the property for $1,000 a week, bringing her $52,000 over the first year. 

That year, she pays around $8,000 interest on the mortgage. She spends another $7,200 on property-related expenses, totalling $15,200. 

After she deducts that amount from her rental income, she has $36,800, which means her property is positively geared for that year. 

Now comes the tax part 

That $36,800 is taxable income. It’s also important for Amina to remember that adding the income from an investment property to her day job could bump her into a higher tax bracket.  

However, as an investor, there’s a range of special deductions she can make to try and reduce her tax obligation. 

Deductions she can make include:

• interest on her loan
• council rates
• repairs and maintenance
• advertising for tenants
• land tax
• pest control
• insurance
• property agent’s fees and commission
• legal expenses 

As always, it’s a good idea to take into account your personal situation and any tax implications before buying an investment property. It could be worth consulting with a financial adviser to work out the right investment plan for your individual circumstances.  

How can I find a positively geared investment property? 

It’s more common to find a positively geared property when interest rates are low, rental demand is high, or both. 

You might also end up with a positively geared property if you’re able to put down a large deposit, which reduces the amount you need to borrow and lowers your interest charges. 

Of course, if your strategy relies on getting a positively geared property, you want to leave as little to chance as possible. At the end of the day, it all comes down to research.  

Researching the rental yields and growth of suburbs you’re looking at is a good idea. A property report is also a useful way to get property information. They can be found for free online via your state government. They typically include details and insights about the property and area. 

How do interest rates impact positive gearing? 

Positive and negative gearing come down to the balance of interest rates, rental yield and deposit amount. Depending on the other two factors, a change in interest rates can shift an investment property from positively to negatively geared or vice versa. 

Where can I compare home loans?  

We’ve partnered with Lendi to help you compare a range of different providers on the market. Use our online tool to compare home loans and get started on that investment plan.