Can negative gearing be used as a profitable strategy for property investors?

Is negative gearing still a valid strategy in today’s property climate?

A negatively geared property is when we buy an investment property that loses more money than it makes on a regular basis. That means we’re paying more money in expenses than we are making in rental income.

Taxation benefits

"When you're losing money, you can offset this against your taxable income"

The ideal benefit of this is that the property goes up in value and you get more capital gains than you spend in expenses. Then you can also get a tax break in most circumstances from those expenses. When you’re losing money, you can offset this against your taxable income.

Negative gearing can be a good idea when you have enough disposable income to afford the property. This means you’re probably earning a decent wage and you have enough disposable income that you can afford to hold the property and pay for the losses without going deeper into debt and without running into cash flow difficulties.

On the flipside

There is a view that in some cases those properties that are positively geared experience less capital growth than those negatively geared. However, this isn't always the case.

Alternatively, some financial advisers will advise to have positively geared property. This is where the net rental income after deductions and expenses is more than the interest on the borrowings. There is a view that in some cases those properties that are positively geared experience less capital growth than those negatively geared. However, this isn’t always the case.

It really comes down to your circumstances and what is available to you. While negative gearing helps to reduce your tax, it does mean that you will be out of pocket each year. You need to be able to maintain this over the long term so that you can gain the benefit of the capital growth.

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