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

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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.

ask paul clitheroe negatively gear

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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Paul Clitheroe AM is founder and editorial adviser of Money magazine. He is one of Australia's leading financial voices, responsible for bringing financial insight to Australians through personal finance books, the Money TV show, and this publication, which he established in 1999. Paul is the chair of the Australian Government Financial Literacy Board and is chairman of InvestSMART Financial Services. He is the chair of Financial Literacy at Macquarie University where he is also a Professor with the School of Business and Economics. Click here to email Paul your money question. Unfortunately Paul cannot respond to questions posted in the comments section. Please view our disclaimer here.