Negative Gearing VS Positive Gearing

Recently there has been a lot of noise from property people spouting strong opinion on their side of the perennial negative vs positive gearing argument. Positive gearing proponents will tell you it’s stupid to buy an asset and lose money on a week to week basis. Negative gearing supporters will tell you that the tax advantages outweigh the small loses you normally take on those types of assets.

So which way is best?

Nyko Property strongly believes that gearing (debt taken out to buy an investment asset) should not be the basis used to make investment decisions. It is simply a vehicle to buy property, whether it’s positive or negative doesn’t affect the quality of the actual asset. It does however affect the investors overall plan and that is what should be considered before making any investment decision.

At Nyko Property we recommend Growth Property first and foremost

Growth property, simply speaking, is property that is selected for the likelihood of above average capital growth. They also normally offer lower risk as they are located in major cities which are not as susceptible to downturns in specific industries which can lead to loses in property values.

Most of the time, growth property starts off negatively geared (If you borrow 100% of the property’s value plus all associated costs) but if they are quality assets they normally turn into positive cash flow properties within 5-10 years.

It’s not that we like to recommend properties that cost money to hold, and one thing we try to minimise is the cash flow impact, it’s just that it makes sense to spend a little, when you have to, to get a lot more. Two per cent higher capital growth on a $450,000 asset is $9,000 per annum (compounding). That means the positive geared property would have to be $173 per week better off than the negative geared property just to break even. That doesn’t take into account the effect of compounding which would make that figure greater each year the property is held.

Positive Geared property on the other hand is normally located in rural areas, smaller towns or the very outer fringes of cities. Generally it is also older property, so again the investors profile and attitude towards risk is very important as they will more than likely have to do some renovations to the property or at the very least be open to a higher degree of ongoing maintenance. This is not a passive investment.

The Perfect Investment Property

In a perfect world your property would have the following attributes:
1. Growth property for wealth building
2. Located in a Megalopolis (only Melbourne and Sydney in Australia) for risk mitigation
3. Positive cash flow for ease of duplication and less impact on lifestyle
4. New or near new for low maintenance and higher demand from quality tenants

The problem is this type of property just doesn’t exist. If you want the other three factors you normally have to come to terms with the fact that the property you purchase may be slightly negatively geared. The less you have to put in to cash flow the property the better!

So is there a place for positive geared property in an investor’s portfolio? Of course there is, in fact at some point you will not be able to continue buying if all your properties are negatively geared. Ideally, by the time you get to that point the first of your growth properties would be positive geared – this is a win-win scenario and allows you to continue buying growth property with no negative effects to your lifestyle.

At Nyko Property we strongly believe capital growth is the most important factor when selecting property, with cash flow a close second. Other factors like tax benefits are a distant third and should be looked upon as an added benefit rather than a reason to invest.

P.S Property selection is critical, no matter what method you choose. There are bad options using both methods which will substantially increase your risk and must be avoided. Equally as important to understand is that growth property today is not what it was 10 years ago. Research is the key.

Bill Nikolouzakis – Nyko Property

Bill Nikolouzakis (250px)

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