Negative & Positive Gearing

The key premise of "negative gearing" is the expectation of eventual profit through capital gains over the long term. Taking the view that real estate assets appreciate at certain average rates over time, the negatively geared property investor expects his/her property to grow whilst cost of owning the asset is taken care of or mostly offset by the rental income.

Negative gearing suits some more than others. Accordingly, it is prudent to obtain independent legal, financial and real estate advice before embarking on any property purchase or loan application.

"Positively geared" or cash flow positive properties are those that enjoy the opposite situation (i.e., where ongoing costs are less than rental income). Investors searching for that illusive positively geared property might often look in outer suburban and rural areas. However, there is often a trade-off. These higher-yielding properties will also traditionally coincide with low property price growth.

The key factors in assessing the positive cash flow of a particular property include not only the rental income and prevailing interest rates, but also allowable deductions and your own marginal tax rate.