If you’re looking to break into the investment property market, it’s important to know the right investment strategy for you. One of the first decisions you’ll need to make is whether you’re going to positively gear or not.
The term ‘Positively Geared’ refers to when the rental income you receive from tenants exceeds the expenses related to owning a property, such as loan repayments, interest, property maintenance, management fees, rates etc.
This commonly occurs when rents are high due to strong demand for rental property and interest rates are low. A positively geared investment can also be referred to as a ‘positive cash flow property’ due to the additional funds in your pocket each month.
The Advantages of Positive Gearing
Increased income – The investment property will be generating rental income, which means you’re making an ongoing net profit on the rental property.
More option – The extra cash flow generated from the property could go towards making extra repayments, renovations, savings, into an offset account, or even be used to buy another investment property.
Less risk – If your income circumstances change then the rental income earned from the property will cover the costs of the investment, decreasing the need to sell.
Reduce debt – In comparison to negative gearing, a positively geared property portfolio reduces your overall debt.
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 and increase your borrowing capacity.
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 see less or slower capital growth.
May be 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 – say in a mining town or holiday area.
An Example of How to Calculate Positive Cash Flow
Fi, has been working in the Public Service for over 10 years. She started as a graduate and worked her way up to a managerial position. Throughout this time, Fi has been diligently saving her money to buy an investment property and has saved $195,000 for a deposit.
Because of the high property daman, it took Fi some time to find the right investment for her. But when she found a townhouse close to the city, she took the plunge and used her $195,000 as a (30%) deposit towards the $550,000 cost.
She found tenants without fuss, and now the property generates $2,440 in rent a month. The mortgage, plus other expenses, total $1,400 per month. For Fi, that’s $1,040 of positive income a month or $12,480 per year. So, Fi’s property is positively geared!
To calculate the yield, let’s divide $12,480 by Fi’s initial $550,000 investment. Resulting in an average positive cash flow of 2%.
Your investment strategies should be aligned to your personal circumstances and risk preferences.
Should you Positively or Negatively Gear your Investment Property?
Your investment strategies should be aligned to your personal circumstances and risk preferences.
As mentioned, positive cash flow properties generate an instant return, which means you’re making a real cash profit from the moment you purchase your investment. However, this may impact the type of property you invest in and where. Making negatively gearing a more appealing long-term strategy for an investment. Read our Negatively Geared (Capital Growth Property) blog to compare the two and learn what investment strategy may work best for you.
Because even if you have plenty of equity, it’s not guaranteed that you can borrow against it. The bank will consider a range of factors such as your income, your age and if you have any additional savings or debts before giving you the green light for a loan.
It’s important to keep yourself protected, so before deciding on which strategy is best for you, talk to a professional.
Interested in learning more about how you can utilise gearing for your investment property? Speak to our friendly team for a tailored consultation on 1300 815 921 or at info@greenassociates.com.au
At Green Associates, all of our advisers are fully licensed and listed on the ASIC Moneysmart Financial Adviser Register. Green Associates is committed to providing the best solutions for you and your wealth-creation journey.
