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

ask paul clitheroe negatively gear

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.

Written by Paul Clitheroe

Paul Clitheroe

Paul Clitheroe AM is a respected financial adviser and Money’s chairman and chief commentator. He is chair of the Australian Government Financial Literacy Board, and author of several personal finance books. Ask Paul your money question.

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