What is 'negative gearing' on an investment, how does it work and why do it?

It's when a property investor borrows funds to purchase an investment property, and the cost of holding and managing that investment property is greater than the gross income the property brings in.

In New Zealand, costs incurred in earning income are generally tax deductible, so negatively geared properties afford investors certain concessions.

How does negative gearing work?
According to www.ird.govt.nz if you have a net salary of $50,000 and borrowed $102,000 at 10% interest to buy a property. Income from this investment for the year is $6,240 (which is after deductible expenses other than interest).

When to use a negative gearing strategy
It is typically used if you have the funds to cover the shortfall between the cost of holding the property and the rental income.

Holding a negatively geared rental property long-term may also see good capital growth, or become a positively geared property if the market goes up during that time.

While there is much debate on whether or not positively or negatively geared investment properties are the better option for investors, it really comes down to your financial situation and the type of investment property you are considering.

It depends if you are looking for long term capital growth (negative gearing) or positive cash flow (positive gearing).

Shannon CorbettComment