The Difference Between Positive and Negative Gearing and Generating Cash-Flow
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In real estate terms, the word "geared" is used to describe when loans are used to buy shares or properties. Gearing can be positive or negative depending on the income that is generated from the property. Negative contracting is when income from either dividends or rent does not generate enough income to make payments on interests. And positive geared is when the property generates some sort of an awareness. Another terminology to be familiar with is cash-flow, which is what you earn or lose from an investment in a property. Do not let the "negative gearing" and "positive cash-flow" confuse you. Keep reading to better understand the different terminologies and how to evaluate them in various situations.
Think of negative geared as what you¡¯re losing each month in cash to cover any expenses on your investment property. Therefore, on paper you are seeing that you're investing more out-of-pocket cash to cover expenses for that property. The costs associated with property ownership and the legalities around what you may claim will differ depending on the country in which you stay. Do not stress out! Just know that you can lose cash each month (negative geared) while still generating cash-flow. Yes, it's true! You may just be looking at a smaller profit margin, that's all.
And of course, you would have already predicted that positive gearing also yields a positive cash-flow. If you're not spending any out-of-pocket money then any money that the property generates would be considered a profit. It's a win-win situation. You can not, however, have a negative cash-flow and positive borrowing because in the cash of a negative cash-flow, where you're losing money (real cash) on a monthly basis. In other worse, your property is not generating any real income for you. Again, do not stress out yet. You can still recover some of the losses through a write-off. You have to think of your investment as a long-term investment. There will be periods where there will be no return on your investment, but over the length of the long-term investment, you will have made some profit. Just make sure that you have some cash-flow to support the property through the long-term investment period should there be times when it's not generating any income. This will ensure that your investment is more worthy over time.
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