A lot of investors want to know the difference between positive gearing and negative gearing and which investment strategy is going to be best for them.
In this article we will explain the difference between positive gearing and negative gearing and then at the end we have a quick questionnaire that you can answer to discover which investment strategy is best suited to you.
What Is Positive Gearing?
Positive gearing is an investment strategy where the investment (usually property) generates a higher income than you pay in expenses. This means that you receive money from your investment on a regular basis.
Positive gearing is used to create a passive income, but it is also effective for allowing investors to hold multiple investments without having to pay money to own those investments. This then gives the investor access to capital gains on multiple properties.
What Is Negative Gearing?
Negative gearing is an investment strategy where the investment (usually property) has expenses greater than the income. This means you are required to pay money on a regular basis in order to hold the property.
When negative gearing the goal is almost always to make more money through an increase in value (capital gains) than you lose on the property by paying for its expenses.
The Difference Between Positive Gearing and Negative Gearing
Positive gearing and negative gearing are quite different investment strategies with different goal outcomes.
Negative geared property focuses on making money through capital gains and then accessing that capital gains either through an equity loan or by selling the property. It requires the property to go up in value in order to make money and the end goal is that large lump sum.
Positive geared property focuses instead of cash flow first, but also takes advantage of potential capital gains. Capital gains are used as a way to purchase more property or to get a greater return on investment than the property is already providing. The end goal when positive gearing is to increase your passive income, usually to the point so that the investor doesn’t have to work in order to survive.
The main difference is that a negative geared property loses you money each week while a positive one makes you money each week.
Positive Gearing vs Negative Gearing, Take The Test
We have created a quick 6 question quiz that will give you an idea of which investment strategy may be best suited to you.
1. Are you investing for:
a) a large lump sum
b) smaller amounts on an ongoing basis
2. Do you wish to invest in:
a) high growth areas
b) areas with a high rental yield
3. Your end goal is:
a) to be rich
b) to have financial freedom
4. Do you wish to purchase:
a) just a few investment properties
b) a large amount of investment properties
5. Do you have a:
a) large disposable income where you pay a lot of tax
b) little disposable income and don’t pay much tax
6. Do you want to purchase property:
a) close to where you live
b) anywhere as long as it produces the results you want
If you answered mostly A’s to the questions above then it is likely that negative gearing could be a good investment strategy for you.
If you answered mostly B’s then you may wish to look into positive gearing as an investment strategy to build up your passive income and achieve financial freedom.
So Which Investment Strategy Is Better?
Neither investment strategy is better than the other. They are both very different strategies and the benefits will vary depending on the investor.
You need to decide for yourself which investment strategy you want to pursue and which is most likely to help you achieve your financial goals as quickly as possible.