Positive gearing vs negative gearing in Airbnb

If you’re planning to get involved in real estate investment, you’ll likely have heard of various investment strategies, including positive gearing vs negative gearing. Though these may sound like complex topics, it can be simplified by answering this question: "Is the income you're receiving for your property higher or lower than the overall amount you pay to own it?".

It’s important for all property investors to understand what these concepts are, since they directly impact tax and how much you can earn from your Airbnb. In this article, we'll break down the differences between positive gearing vs negative gearing in Airbnb, how to determine which category your property falls in, and its implications for you as an STR owner.

Positive gearing vs negative gearing in Airbnb

Here's a quick summary of positive gearing vs negative gearing, as well as the advantages and disadvantages of each:

What is positive gearing?

Positive gearing happens when a property's rental income exceeds its expenses. This approach is known for generating immediate cash flow and less reliance on property appreciation. Positive gearing is often associated with properties in high-demand rental markets and can provide a steady source of income​​​​.

• Advantages of positive gearing
  
  • Immediate Profit: Properties under positive gearing generate surplus income, offering immediate financial benefits and the potential to reinvest or reduce debts​​.
  • Lower Risk: With a stable income stream, these properties present a lower financial risk and can provide a safety net in uncertain economic times​​.
• Disadvantages of positive gearing
  
  • Tax Implications: The additional income is taxable, which could affect your overall tax liability​​.
  • Dependent on Market Conditions: These properties can be sensitive to market fluctuations, affecting their rental income potential​​.

What is negative gearing?

Negative gearing occurs when the rental income from a property is less than its operational expenses, including mortgage, maintenance, and taxes. This scenario is often seen as a long-term investment strategy, relying on the property's value appreciation over time. While negative gearing presents immediate cash flow challenges, it can offer significant tax deductions and potential for capital growth in the long run​​​​.

• Advantages of negative gearing
  
  • Tax Benefits: One of the primary attractions of negative gearing is the potential for tax deductions, helping to mitigate the impact of rental shortfalls​​.
  • Tenant Attraction: Properties under negative gearing often have lower weekly rental rates, increasing their appeal to tenants and ensuring consistent occupancy​​.
  • Capital Growth: Focused on long-term appreciation, these properties can yield substantial returns when sold, particularly in prime locations.
• Disadvantages of negative gearing
  
  • Financial Risk: The need to cover cash shortfalls requires substantial financial resilience, posing a higher risk, especially in unstable market conditions​​.
  • Long-Term Focus: Investors need patience and a long-term perspective, as the benefits of negative gearing accrue over time, often requiring years to realise​​.

How to calculate positive gearing vs negative gearing

To calculate whether your Airbnb property is positively or negatively-geared, take your entire rental income and deduct all your outgoings such as:

• Mortgage fees
• Land taxes
• Council and water rates
• Insurance
• Repairs and maintenance
• Advertising and real estate agents
• Other tax deductions as mentioned in ATO's rental property guide

For example, if your Airbnb earns $500 a week, but property maintenance costs $450 a week:

$500 -$450 = $50. This means your Airbnb is positively-geared.

On the other hand, if your Airbnb earns $500 a week, but property maintenance costs $600 a week:

$500 -$600 = -$100. This means your Airbnb is negatively-geared.

Is negative gearing worth it?

For Airbnb property owners, the choice between negative and positive gearing has unique implications. Negative gearing can be particularly relevant given the variable nature of Airbnb income. With fluctuating rental rates and occupancy levels, expenses might occasionally outpace income, leading to a temporarily negative-geared scenario. However, the flexibility in pricing and the potential for high-demand periods can offset these periods, making Airbnb properties potentially lucrative in the long term. 

On the flip side, positive gearing is achievable in high-demand areas where Airbnb properties can command premium rates, ensuring a steady and robust income that surpasses expenses. This scenario is ideal for owners seeking immediate cash flow from their Airbnb rentals. In both cases, the dynamic nature of the short-term rental market necessitates a more active management approach to maximise returns and minimise risks.

Need assistance managing your Airbnb's revenue? Schedule a call with Hometime below:

We use our expertise in short-term rental management to streamline Airbnb management tasks and help you determine strategies such as whether your property is negatively or positively geared. By partnering with us, you ensure that your investment aligns with your financial goals while minimising operational burdens.

Our full-service management includes:

• Property onboarding: Full setup, including Airbnb styling, and real-estate photography, and listing optimsation
• Listing and booking management
• Airbnb cleaning services and property maintenance
• Dynamic pricing and revenue optimisation
• Guest communication