POSITIVE GEARING VS NEGATIVE GEARING

Jul 30, 2013

Understanding Positive Gearing vs. Negative Gearing: A Guide for Property Investors in New Zealand

Investing in property can be a lucrative venture, but it’s essential to understand the financial strategies involved. Two terms that frequently arise in property investment discussions are positive gearing and negative gearing. In New Zealand, these concepts play a significant role in how investors manage their real estate portfolios. Let’s delve into what positive gearing and negative gearing entail and how they differ.

chart going upwards

Positive Gearing

Positive gearing occurs when the income generated from an investment property exceeds the expenses associated with owning and maintaining that property. In simpler terms, it means your rental income is higher than your mortgage payments, property maintenance costs, rates, and other outgoings.

Key Points of Positive Gearing:

  1. Income Surpasses Expenses: The rental income you receive from tenants covers all costs related to the property, leaving you with a surplus.
  2. Profitable Investment: Positive gearing typically indicates a profitable investment, where you’re making money from day one.
  3. Tax Implications: Since you’re making a profit, you’ll need to pay tax on the rental income. However, this can be offset by deductions for expenses such as interest payments, repairs, and management fees.
  4. Risk Mitigation: Positive gearing provides a buffer against unexpected expenses or interest rate rises, as your property is generating a surplus.

Negative Gearing

Conversely, negative gearing arises when the expenses of owning an investment property exceed the rental income it generates. This means you’re operating at a loss, with the expectation that property appreciation will eventually outweigh the ongoing financial deficit.

Key Points of Negative Gearing:

  1. Operating at a Loss: Your rental income is insufficient to cover all expenses, resulting in a shortfall.
  2. Tax Benefits: In New Zealand, investors can claim tax deductions for the losses incurred through negative gearing, including mortgage interest payments, rates, repairs, and management fees.
  3. Long-Term Investment Strategy: Negative gearing is often seen as a long-term strategy, with investors banking on capital gains to offset their losses and eventually turn a profit when they sell the property.
  4. Risks: Negative gearing carries higher risks, especially if interest rates rise or property values stagnate or decline. Investors must have the financial stability to withstand ongoing losses.

Comparison: Positive vs Negative Gearing

Positive gearing provides immediate returns and a sense of financial security, as your investment generates a surplus income. However, finding positively geared properties can be challenging, especially in markets with high property prices and low rental yields.

On the other hand, negative gearing allows investors to leverage tax benefits and speculate on future capital gains. While it offers potential for higher returns in the long run, it requires careful financial planning and risk management due to the ongoing losses.

Conclusion

In the realm of property investment in New Zealand, understanding the concepts of positive gearing and negative gearing is crucial for making informed decisions. Whether you opt for positive gearing to enjoy immediate returns or negative gearing to leverage tax benefits and potential capital gains, it’s essential to assess your financial situation, risk tolerance, and investment goals before diving into the market. Consulting with financial advisors or investment accountants can provide valuable insights tailored to your specific circumstances, helping you navigate the complexities of property investment successfully.

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