Gearing is one of the most commonly misunderstood concepts in Australian property investment. Getting it right is the difference between a tax-effective investment strategy and one that quietly drains your cash flow. This guide explains both strategies in plain English.
What Is Gearing?
Gearing simply means borrowing money to invest. In property, a geared investment is one where you have taken out a loan to purchase the asset.
What Is Negative Gearing?
A property is negatively geared when the costs of owning it (interest, rates, insurance, management fees, maintenance, depreciation) exceed the rental income it generates. The investor makes a loss on the property each year.
The key benefit in Australia is that this loss can be offset against other income, reducing your taxable income. For high-income earners in the 45% tax bracket, a $10,000 annual loss costs just $5,500 after the tax benefit.
Negative gearing is typically a capital growth strategy. The investor accepts short-term cash flow losses in exchange for long-term capital appreciation.
What Is Positive Gearing?
A property is positively geared when rental income exceeds all ownership costs. The investor makes a profit each year and pays tax on that profit.
Positive gearing is a cash flow strategy. The investor receives regular income from the property without relying on capital growth to make the numbers work.
Negative Gearing vs Positive Gearing — Comparison Table
| Factor | Negative Gearing | Positive Gearing |
|---|---|---|
| Cash flow | Negative (costs exceed rent) | Positive (rent exceeds costs) |
| Tax position | Tax deduction on loss | Tax payable on profit |
| Strategy focus | Capital growth | Cash flow and income |
| Risk profile | Higher (reliant on growth) | Lower (income from day one) |
| Best for | High income earners | Investors seeking passive income |
| Typical property type | Inner-city, high-value | Regional, high-yield suburbs |
Which Strategy Is Right for You?
The answer depends on your income, tax position, risk appetite, and investment timeline. A Collings Property Advisor can assess your specific situation and help you identify whether negative or positive gearing better suits your property investment goals.
Frequently Asked Questions
Can I switch from negative to positive gearing?
Yes. As rents rise over time, a negatively geared property can become positively geared. You can also increase rent to market rate or reduce your loan balance to shift the position.
Is negative gearing always worth it?
Not necessarily. Negative gearing only makes sense if the capital growth on the property is sufficient to justify the annual cash flow losses. A property that neither grows nor generates income is simply a bad investment.
Does negative gearing affect my borrowing capacity?
Yes. Lenders assess negatively geared properties as a liability against your income. Multiple negatively geared properties can significantly reduce your borrowing capacity.
Get Independent Property Investment Advice
Whether you are buying your first investment property or reassessing your portfolio strategy, a Collings Property Advisor can help you make the right decision. For $4,500 + GST you receive independent property analysis, investment assessment, and expert negotiation support.
Contact Collings Property Advisory at collings.com.au/portal to get started.
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