A property is negatively geared when the rental income is LESS than the property expenses including interest on the loan.
I am sure you’ve heard about property opportunities in the past: “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’re probably thinking, aren't investment properties supposed to make you money? Who would invest in a loss-making situation?
In an upward-trajectory market such as Sydney circa 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.
Therefore, negative gearing is one strategy that could be considered in the right market; with the right interest rates, deposits, and strategies. Keep 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 cash flow-positive property will help most people sleep better at night because the financial burden is minimised.
The Key Take-Away
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.