Understanding the Risks of Negative Gearing
Negative gearing can be an effective investment strategy in the right circumstances — but it’s not without risk.
Too often, people focus on the potential tax benefits without fully considering the downsides. Understanding the risks of negative gearing is essential before deciding whether it fits your financial situation and long-term goals.
Below are the key risks every investor should be aware of.
Ongoing Cash Flow Pressure
The most obvious risk of negative gearing is cash flow.
By definition, a negatively geared property costs more to hold than it earns in rent. That means you must contribute money from your own income to cover the shortfall.
Even with tax deductions, this ongoing cost can place pressure on your budget — especially if your income changes or unexpected expenses arise.
Tax Benefits Are Often Overestimated
A common misunderstanding is that negative gearing means you get the loss back at tax time.
In reality, tax deductions usually return only a portion of the loss, depending on your tax rate. You still fund the remaining cost yourself.
Relying too heavily on tax outcomes without understanding the real cash impact can lead to disappointment.
Interest Rate Increases Can Amplify Losses
Negative gearing is sensitive to interest rate movements.
If interest rates rise, loan repayments increase and the cost of holding the property can grow quickly. This can turn a manageable shortfall into a much larger financial burden.
Without sufficient buffers, rate rises can significantly increase risk.
Rental Vacancies and Unexpected Costs
Property investing doesn’t always go to plan.
Vacancies, unexpected repairs, maintenance issues, or changes in rental demand can reduce income or increase expenses.
For a negatively geared property, these issues can compound losses and put additional strain on cash flow.
Capital Growth Is Not Guaranteed
Negative gearing often relies on the expectation of long-term capital growth.
If property values don’t increase as expected — or stagnate for an extended period — the cumulative holding costs may outweigh any eventual gains.
This is why negative gearing should never be based on tax benefits alone.
Changes to Personal Circumstances
Negative gearing often works best for people with stable incomes.
Changes such as job loss, reduced hours, family changes, or increased personal expenses can make holding a negatively geared property much harder.
What feels affordable today may not feel the same in a few years.
Policy and Tax Rules Can Change
Negative gearing is influenced by tax legislation and government policy.
While rules don’t change frequently, relying heavily on any tax-based strategy carries some level of policy risk over the long term.
This is another reason to ensure the investment stands on its own merits.
Loan Structure Can Increase Risk if Poorly Set Up
How your investment loan is structured plays a major role in risk.
Higher interest rates, inflexible loan features, or poor use of offset accounts can increase holding costs and reduce flexibility.
A poorly structured loan can magnify the risks of negative gearing.
Why Understanding the Risks Matters
Negative gearing can work well when risks are understood, planned for, and managed.
Problems often arise when investors focus only on the upside and underestimate the ongoing costs and uncertainties.
Tax professionals such as
The Accountants
can help explain how negative gearing affects your tax position and whether the strategy is appropriate for your circumstances.
How Chase Helps Manage the Finance Risks
While negative gearing is often discussed as a tax concept, the finance structure behind the investment has a significant impact on risk.
Chase Douglas has extensive experience in mortgage lending and helps investors understand how loan structure, interest rates, and cash flow affect strategies like negative gearing.
Chase focuses on helping clients assess affordability, build buffers, and structure loans that reduce risk rather than amplify it.
Should You Be Cautious With Negative Gearing?
Negative gearing isn’t inherently risky — but it does require careful planning.
Understanding the risks allows you to make informed decisions and avoid surprises down the track.
👉 Book a conversation with Chase Douglas to understand the finance risks involved and whether negative gearing suits your situation.
Smart investing starts with understanding both the upside and the downside.
