"I've heard people talk about negative gearing and positive gearing... what's the difference?"

"Gearing" is the financial industry word for "leverage"… or using a little to buy a lot. "Negative Gearing" simply means that the income generated by the investment doesn't cover the expenses.

Investments which are geared negatively rely on taxation benefits to make them "affordable" and capital growth to make them "profitable".

Example. Lets say after all the tax benefits have been claimed, your investment property cost you $20 per week or $1000 per year. Obviously the property must increase in value more than this to make the investment worthwhile.

In addition, the assessment of its investment "worth" must also take into account the "opportunity cost" of what you could have done with the $1000 as an alternative investment strategy. If the $1000 could have doubled… then the property must increase by $2000 to cover this.

So why do it?

Of course property does not have to be negatively geared. It can be, and often is, "Positively Geared". Ie. The rent is sufficient to cover all the outgoings. This can be achieved with an initial cash deposit or by investing in a property where the "yield" or rental income is proportionately higher.