Negative Gearing vs Positive Gearing in Property Investment

You might be wondering whether it’s better to have a positively geared or negatively geared property, especially if your long-term goal is to retire through real estate investing.

The truth is, both strategies can be effective, depending on your goals, financial situation, and how you plan to build your portfolio. In this blog, you’ll learn:

• When it’s better to have a positive portfolio
• When it’s better to have a negative portfolio

With rising interest rates, it’s becoming harder to find positively geared properties if you’re financing at around 90% loan-to-value ratio (LVR). You may only find yourself positively geared if you have a larger deposit (30 to 40%) or if you bought a property several years ago, and have since benefited from rent increases and lower fixed interest rates.

Before we compare the two strategies, let’s first understand what positive and negative gearing mean.

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Positive Gearing Explained

Positive gearing occurs when your property’s rental income exceeds all ownership and maintenance expenses such as mortgage repayments, insurance, rates, and property management fees.

For example, if your investment property rents for $500 a week and your total costs are $450 a week, you’re positively geared by $50.

This means your property is generating a surplus income, not just covering its own costs. Many investors find this appealing because it creates immediate cash flow that can supplement your income or be reinvested into your portfolio.

However, keep in mind that this additional income is taxable, just like your salary.

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Negative Gearing Explained

Negative gearing is the opposite. It happens when your property’s expenses are higher than its rental income. For instance, if you’re earning $500 in weekly rent but paying $550 in expenses, you’re negatively geared by $50.

While this might sound like a loss, negative gearing can still work to your advantage. Because the property is operating at a loss, you can use that loss to offset your taxable income, reducing the amount of tax you pay.

That said, buying a property solely for the tax benefits isn’t a smart strategy. You shouldn’t acquire assets just to reduce taxes. Your main goal should always be to increase your wealth.

After all, you wouldn’t spend a dollar just to save 50 cents. Likewise, avoiding profit because it’s taxable means missing out on the remaining 55 cents you could have kept.

Over time, many negatively geared properties naturally become positively geared as rental income grows and your debt remains stable.

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When Each Strategy Works Best

On the surface, it might seem like positive gearing is the best path to financial freedom, especially if you’re focused on replacing your income. For example, if you earn $20,000 per property after expenses, you’d need four properties to replace an $80,000 salary.

However, long-term wealth building requires more than just cash flow. You also need capital growth to help you expand your portfolio faster.

Here’s why: If you focus purely on yield, you may find yourself limited by deposit requirements and borrowing capacity. Saving for each new property can take years, especially as prices rise. However, if your property experiences steady capital growth (5 to 7% per year), you can use the equity from that growth as a deposit for your next purchase, helping you scale much faster.

This is why a balanced approach often works best. Cash flow keeps you in the game, while capital growth gets you out of the game.

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Finding the Right Balance

If your properties are too negatively geared, lenders may reduce your borrowing capacity. Alternatively, if they’re all heavily positively geared, you might limit your growth potential.

The key is finding properties that are neutral or slightly negative but positioned in growth markets with strong fundamentals. This combination allows you to grow your portfolio sustainably while maintaining manageable cash flow.

Always back your decisions with data because while opinions differ, data doesn’t lie. Use it to guide your property selections, validate your assumptions, and make informed investment moves.

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Kickstart Your Property Investment Journey

To build long-term wealth through real estate, you need both cash flow and capital growth. Cash flow helps you hold your assets, while capital growth accelerates your equity and brings you closer to retirement.

You don’t have to choose one over the other. The most successful investors know how to balance both strategies based on their goals.

If you want expert help identifying properties that deliver both growth and stability, book a free discovery call with Search Property’s buyers agents. We’ll help you create a strategy, pinpoint high-performing markets, and build a portfolio designed for long-term success.