Positive vs Negative Gearing Property Investments

We all want our investments to make significant gains, but there are times when negative cash flow can help with the books. See how negative gearing can save you money.

Nathan Daly
October 16, 2020

Positive vs Negative Gearing Property Investments

When most people think about investments, they think about growing their capital base - and as quickly as possible. But investing is difficult. But it’s not always about making money - sometimes, it’s about saving money.

Have you ever considered that there are times when a “losing” investment could work in your favour? Granted, no one wants to lose money - it’s counterintuitive to our inherent desire for security, comfort...for more money. But there are times when the controlled and calculated loss is a good thing.

Now, before you intentionally venture down the road of “losing to win”, you need to understand income, expenses, and tax consequences. In fact, this strategy of “losing to win” is risky and best left to the professionals, so we advise you to seek advice from your accountant before attempting this on your own.

Positive Cash Flow

First, the obvious: People make investments to make money. Money makes the world go ‘round, and some people think you can never have enough. So we take our hard-earned cash and look for ways to make it work for us by investing it on the speculation that it will grow. Real estate is one investment class that is garnering a lot of attention across Australia - particularly in light of the fact the market has witnessed a “soft landing,” whereas just two years prior, prices were akin to a hot air balloon, going up and up and up.

There are a number of ways to get into RE-as-investment, and we’ve presented some ideas, complete with Pros and Cons, for investing in both the residential and the commercial markets in a couple of other articles.

As we discussed, the ideal real estate investment generates enough income to pay for itself. Whether it’s commercial or residential, you’d have a tenant who is paying rent. Hopefully, the rent is enough to cover all your expenses, including insurance, mortgage plus interest, taxes, maintenance, depreciation expenses, transfer stamps and everything else that is needed to keep the property in use and good repair, while experiencing capital growth. And if you’re lucky, or just happen to have enough equity to keep your loan obligations to a minimum, you would ideally bring in enough surplus income to contribute toward your lifestyle. After all, that is why we invest - to create a lifestyle of our liking. If you have an investment property that does all this for you, then the investment is Positively Geared and you should count your blessings. Being Positively Geared is great - you sit back while your tenant(s) essentially purchases the investment property on your behalf.

Negative Isn’t Always a Bad Thing

When an investment property doesn’t cover its own mortgage, taxes, insurance, etc, as the owner, you’ll be forced to reach deeper into your pockets every month to make ends meet. Before concluding that this is an unacceptable proposition, hear me out. Now, any good loan broker, agent, friend, or spouse should have and would have stopped you from making such an investment. So let’s just assume the balance sheet isn’t that far out of balance. Instead, let’s assume that the investment is generating income, just not enough to cover all the expenses. This is called Negative Gearing. Perhaps it pays the mortgage and interest but doesn’t quite cover insurance and taxes. If you’re in the right shoes, this can actually work for you.

Negative Gearing can offset your taxable income. While not recommended for every investor, this is a strategic position for many investors with the correct portfolio mix - one that has significant income and capital gains and the resulting taxes. Done with care and proper planning, negative gearing is a strategic move to offsetting those liabilities.

Another strategy where “running in the negative” is of value would be a short-term solution to close a big deal. For example, using a higher interest rate loan, such a private loan to secure an investment property just may be worth the added expense if you are then able to reorganise once the deal is across the line. The higher-rate, short-term solution buys you time to generate income, reorganise the books, restructure loan packages, and ultimately, approach a lender offering lower interest rates. It may cost a little extra at first - starting out as a negatively geared investment - but the asset now sits on your balance sheet, and once you refinance, it is ready to generate more capital growth.

When you decide it’s time to give your portfolio a boost with fresh assets, contact us at Acumen Finance. We are backed with decades of experience and staffed with expert consultants, documentation specialists, accountants, and property development wizards. Closely aligned with a collection of private investors, we have the connections to bring lenders and borrowers together. We use sophisticated calculators to model financing options, and we can reverse engineer the details of your deal to determine the best possible solutions for your loan needs. What are you waiting for?