What is a positively geared property?
Positive gearing occurs when you receive more in rental income from your tenants than what you pay on the likes of loan repayments, interest, property maintenance, management fees, rates etc. This tends to happen at times when rents are high due to strong demand for rental property and low interest rates. Other forms of investments like the dual dwelling property are also a popular choice for those seeking a positively geared investment.
A positively geared investment can also be referred to as a ‘cash flow property’. That’s because the property is putting additional money into your pocket.
How it works
As an example, let’s imagine you purchase an investment property for $400,000 located in a location where vacancy rates are low and demand for rental properties in the area is very high.
You rent the property to tenants for a strong rental return of $500 per week. The repayment costs for your property (loan repayments/property management fees/rates etc.) totals $410 per week. Therefore, after all expenses this property is increasing your income by $90 per week and in turn is paying for itself. In this situation the property is positively geared!
Now let’s consider the advantages and disadvantages when investing in a positively geared property.
The advantages of positive gearing:
– Increased income – you benefit by receiving an income from the property and not having to be out of pocket. You can even use this income to make additional payments into your mortgage and own your home sooner!
– Not as much risk – if your income circumstances changes e.g. if you were to lose your job then the income will cover the costs of the investment and you are less likely to need to sell under pressure and potentially unfavorable conditions.
– Balanced portfolio – some investors may use a positively geared property to balance their portfolio, using the additional income to pay the shortfall of negatively geared investments.
– Lender Attractiveness – the additional income can increase your attractiveness to lenders for additional loans.
The disadvantages of positive gearing
– Taxable – just like any form of income, the income you earn on a positively geared property is taxable.
– Slower long-term growth – often but not always, a positive cash flow investment can be located in a regional area (rather than capital cities), which commonly (but not always) see less or slower capital growth.
– More volatile – these properties may be largely dependent on a particular industry of employment which can make it subject to greater volatility should employment factors weaken.