Ask Paul: Why would anyone want to negatively gear a rental?

Q. I am 25 and looking to begin investing in property but am failing to understand why you would want to negatively gear a rental versus having it positively geared to aid paying it off quicker.

Are the tax benefits truly that beneficial over paying off the debt sooner and increasing the portfolio sooner? - Jake

A. You are right, Jake. Positively geared property, meaning it makes more in rental than you pay in interest and costs, is a great idea.

But it is not just about income; a key issue is capital gain. This tends to come in close to city and public transport locations. Yields are usually low on great property but I would argue the potential gains are higher.

So forget tax for a minute. This is about making good investment decisions.

If you can find a really well-located property in a near-city location that is positively geared, good luck to you. But I think you will find the market is pretty rational and very competitive.

Great property will tend to be low yielding. High-yield properties will be more often in more distant locations. They offer greater yield but poorer capital gain. I'd always go for the best-located property.

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