Master positive and negative gearing to optimise your investment returns
Gearing is the ratio of borrowed money to property value. Negative gearing (expenses exceed income) suits investors with strong income who can claim tax deductions and want capital growth. Positive gearing (income exceeds expenses) suits investors who need cash flow. Most Australian investors start with negative gearing and transition to positive as property appreciates.
The key is choosing a strategy aligned with your financial position, risk tolerance, and investment timeline. Neither strategy is inherently better, it depends on your circumstances.
Gearing is the ratio of borrowed money to property value. It measures how much leverage you're using to amplify returns. Higher gearing means more borrowed money, which amplifies both gains and losses.
Example: $500,000 property, $400,000 loan = 80% gearing (LVR)
If property appreciates 5% ($25,000), your equity appreciation is 12.5% ($25,000 / $200,000 deposit). This amplification is the power of gearing.
Negative gearing occurs when rental income is less than expenses (mortgage, rates, insurance, maintenance). You need cash reserves to cover the shortfall. However, you can claim the loss against other income, reducing your tax bill.
Annual Cash Flow:
Tax Benefit: Claim $4,900 loss against other income. If you earn $100,000 salary and are in 45% tax bracket, you save $2,205 in tax. However, you still need $4,900 cash annually to cover the shortfall.
✓ Advantages
✗ Disadvantages
Positive gearing occurs when rental income exceeds expenses. You generate profit monthly and build equity faster. However, you pay tax on the profit. This strategy suits investors who prioritise cash flow over capital growth.
Annual Cash Flow:
Tax Liability: Pay tax on $4,488 profit. At 45% tax rate, you owe $2,019 in tax. However, you still have $2,469 profit after tax ($4,488 - $2,019).
✓ Advantages
✗ Disadvantages
Our mortgage brokers will help you analyse your financial situation and choose the optimal gearing strategy for your investment goals.
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