Gearing simply means borrowing money to invest.
Think of it like a bicycle. You have gears to multiply your pedal power when you ride uphill. Well, gearing/borrowing for your investment multiplies your investment power so that you can buy a property that you might not otherwise be able to afford.
So, every time you borrow to buy an investment property you are gearing your property.
A property is negatively geared when the rental income is LESS than the property expenses including interest on the loan.
I am sure you have heard property opportunities in the past like “you can own this property for only $100 per week”.At $100 per week, this property would be making a loss of $5200 per year. So, to be ultra-clear you would be paying $100 per week for the privilege of owning an investment property.
Well, you are probably thinking aren’t investment properties supposed to make you money? Who in their right mind would invest in a loss-making situation?
In an upward moving market such as Sydney in April 2021, an argument could be made that you would be happy to pay (or lose) $5,200 per year to hold a property because the property is going up in value by $50,000 to $100,000 or more per year during the boom.
So negative gearing is one strategy that could be considered, in the right market, with the right interest rates, deposit, and strategy. It should be kept in mind that negative gearing would reduce your overall borrowing capacity if you were hoping to create a portfolio of properties.
Ok, so what is positive gearing? A property is positively geared when the rental income is MORE than the property expenses including interest on the loan.
You do not need to contribute anything; the property is fully self-sufficient. A cashflow-positive property will help most people sleep better at night because you just do not have that extra monthly financial burden.
So, should you negative or positive gear your property? That will depend on your needs and goals and how much risk you are willing to take on. Me personally? I like to sleep well at night!