The 5 Major Disadvantages Of Owning Negatively Geared Investment Property Compared To Owning Positive Cash Flow Property

Property is considered negatively geared when it is purchased with the assistance of funds that are borrowed and the outgoing expenses for maintenance of the property exceed the rental income that the property earns.  Although this term is typically used when referring to interest costs and depreciation, it will also include rental deductions. 

Positive cash flow property is the reverse of negatively geared property and is also called positively geared. In a positive cash flow property the returns from the property exceed the expenses that relate to it.  Positive geared property will attract income tax since it is earning an income. 

Although it has been thought that negatively geared investment property has a tremendous potential for growth in the long run, the truth is that it also has several disadvantages that far outweigh the advantages.   

Take a look at some of the disadvantages of negatively geared investment property: 

Liquidity Risk with Negatively Geared Investment Property 

The party interested in trading the asset may find that they are unable to do so because no on in the consuming market is interested in trading that asset. This risk becomes critical for those parties who are currently holding an asset or are likely to be holding one in the near future.  The likelihood of negatively geared investment property facing such a risk is very high due to the sensitivity of real estate.  Buyers and other investors may not want to deal with an owner who may not able to sell the particular property being dealt with.  The only remedy that such a property owner will have is to refurbish the property in order to enhance its odds of attracting buyers or to speculate with it for any possibility of price increases. 

Lack of Credit for Development of the Negatively Geared Investment Property 

Property investors almost always depend on loans to upgrade the property that they already have for sale or for leasing.  For them, the perception of the commercial banker is especially important as this will determine whether or not one will have access to a credit facility.   

Potential lenders would naturally be more reluctant to advance any loans if they deem that the property is unable to raise sufficient rent to fund the loans of if there is a strong or even a slight likelihood of that the value of the property could depreciate.  

Depreciation of Value of the Negatively Geared Investment Property 

Property has always been known to be an investment that will defy depreciation in the long run.  In fact, and as is technically recognized by accounting standards across the globe, depreciation is never charged on land. However, negative geared property will only mean, with certainty, that the owners will face the possibility of never selling it or if they do then it has to be sold at a value lesser than that which would have otherwise be normal. 

Lack of Tenants in any Negatively Geared Investment Property 

Maintenance of negatively geared property is another area that   may very well prove very tricky for investors.  Indeed, the more a property fails to attract tenants the more the owner will suffer from the effects of negative gearing as opposed to positive gearing. 

Loss of Property Equity with Negatively Geared Investment Property 

Equity in your property will only be upped or maintained if the property is earning an income.  Loss in income or no income at all, will mean that the value of the owner (equity) is reducing.  This is significant, especially in the credit market. 

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