Having a positively geared investment property as part of your property portfolio is a popular investment strategy in Australia.
This strategy involves purchasing a rental property that generates more rental income than the expenses incurred to maintain it – this creates a positive cashflow property, also known as a positively geared property. This means that the property owner earns a profit from the investment and can have positive tax implications as well.
Investors who opt for positively geared investment properties typically have a short-term investment horizon and are looking for immediate returns. The strategy is particularly appealing to those who are risk-averse and prefer a steady stream of capital growth. However, it is important to note that positively geared properties may not always be the best long-term investment option, as they may not appreciate in value as quickly as negatively geared properties (especially in periods of slow rental price growth).
Overall, positively geared investment properties can be a lucrative investment option for those looking for more immediate returns. However, investors should carefully consider their investment goals and risk tolerance, as well as understand how positive and negative gearing work, before making a decision. With the right research and due diligence, property investors can find the right positively geared property that meets their investment needs and goals.
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What is a Positively Geared Property?
Positively geared investment property is a real estate investment strategy where a property generates a profit for the investor. For example, if the rental income generated by the property is greater than its expenses, it is considered to be positively geared. Expenses can include but are not limited to
- mortgage repayments,
- maintenance and repair costs,
- property management fees,
This strategy is in contrast to negatively geared investment property, where the rental income generated is less than the expenses incurred. In this case, the investor incurs a loss, which can be used to offset other taxable income.
Investors who are looking for a steady stream of income from their real estate investments often choose positively geared properties. These properties can provide a reliable source of passive income, especially when the rental market is strong.
However, positively geared properties may not appreciate in value as much as negatively geared properties, which can limit the potential for capital gains. Additionally, the investor may have to pay more tax on the income generated by a positively geared property, as it is considered taxable income.
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Benefits of Positively Geared Investment Property
There can be many benefits to owning a positively geared investment property. Some benefits of positively geared investment property:
Immediate Income
One of the most significant benefits of positive gearing is the immediate income generated from the investment property. The rental income generated from the property is higher than the costs associated with owning and managing the property, which means that the investor is earning a profit from day one. This income can be used to pay off the mortgage, reinvest in other properties, or supplement the investor’s income.
Tax Benefits
Another benefit of positive gearing is the tax benefits associated with owning an investment property. The rental income generated from the property is considered taxable income, but the costs associated with owning and managing the property are tax deductions. This means that the investor can claim deductions for expenses such as interest on the mortgage, property maintenance costs, property management fees, real estate agent fees, and council rates. These deductions can significantly reduce the investor’s taxable income and result in a lower tax bill.
Financial Security
Positive gearing provides financial security for the investor. The immediate income generated from the investment property can provide a steady stream of income that can supplement the investor’s income or be used to pay off the mortgage. This can provide a sense of financial security for the investor, knowing that they have a reliable source of income. Additionally, if the property market experiences capital growth, the investor can benefit from both ongoing rental income and capital gains when they eventually sell the property.
Risks of Positively Geared Investment Property
Like all investments, it can also come with risks. It’s important to be aware of these risks and factor them into your overall investment strategy.
Market Fluctuations
One of the biggest risks of investing in positively geared property is market fluctuations. Property prices can rise and fall depending on a variety of factors such as supply and demand, economic conditions, and government policies. If property prices drop, the value of your investment may decrease, and you may be left with a property that is no longer positively geared. It’s important to do your research and invest in areas with a stable property market.
Interest Rate Changes
Another risk to consider is interest rate changes. If interest rates rise, your mortgage repayments will increase, which could impact the cash flow of your investment property. It’s important to factor in potential interest rate changes when calculating your cash flow and ensure that you have a buffer in case of unexpected rate increases.
Property Vacancy
Finally, property vacancy is a risk to consider when investing in positively geared property. If your property is vacant for an extended period, you won’t have any rental income, which will impact your cash flow. It’s important to have a plan in place to minimize vacancy rates, such as working with a reputable property manager who can ensure you achieve the most capital growth over the lifetime of the property.
Identifying a Positively Geared Investment Property
When looking for a positively geared investment property, there are several factors to consider. These factors include location, property type, and rental yield.
Location Factors
The location of the property is one of the most important factors to consider when looking for a positively geared investment property. Properties in areas with high demand and low supply tend to have higher rental yields, which can lead to positive capital growth. Additionally, properties in areas with good infrastructure and amenities such as schools, hospitals, and public transportation tend to be more attractive to tenants, particularly families, which can lead to higher occupancy rates and rental income.
Property Type
The type of property is another important factor to consider when looking for a positively geared investment property. Properties that are easy to maintain and have low operating costs, such as apartments and townhouses, tend to have higher rental yields and can be easier to manage. Additionally, properties that have features that are in high demand, such as parking or outdoor space, can command higher rents and lead to positive cash flow.
Rental Yield
Rental yield is the amount of rental income generated by a property, expressed as a percentage of the property’s value. When looking for a positively geared investment property, it is important to consider the rental yield. Properties with higher rental yields tend to generate more income than those with lower yields, which can lead to positive cash flow. However, it is important to note that rental yield should not be the only factor considered when evaluating a property’s potential for positive cash flow. Other factors such as vacancy rates, maintenance costs, and financing costs should also be taken into account.
Managing a Positively Geared Investment Property
Managing a positively geared investment property requires effort and attention to detail. Here are some important sub-sections to consider.
Finding Tenants
One of the most important aspects of managing any investment property is finding reliable tenants. It is essential you employ quality and effective marketing strategies right from the beginning like ensuring your advertised rent is competitive for the market, the property advertisement showcases the property’s unique features through the description and professional photography, and the property caters for the key demographics of the area.
You may wish to work with a Property Manager who can assist with not only the advertising of the property but conduct thorough background checks on all prospective tenants, to ensure you find the right tenant for your property.
Maintaining Property
Maintaining the property is crucial to ensuring that it remains in good condition and continues to generate income. This includes regular inspections, repairs, and upgrades as necessary. It is also important to keep the property clean and presentable, both inside and out, to attract and retain tenants.
Handling Finances
Managing finances is an important part of managing a positively geared investment property. This includes keeping track of income and expenses, creating a budget, and paying bills on time. It is also important to plan for unexpected expenses, such as repairs or vacancies, and to set aside funds accordingly.
Key Takeaways
- Positively geared properties generate more rental income than expenses, offering immediate profit and positive tax implications.
- Suitable for investors seeking short-term, risk-averse investments with immediate returns, though they may not appreciate as quickly as negatively geared properties.
- Benefits include immediate income, tax deductions, and financial security, but come with risks like market fluctuations, interest rate changes, and property vacancy.
- Successful management involves finding reliable tenants, maintaining the property, and handling finances effectively.
- Consideration of location, property type, and rental yield is crucial in identifying a viable positively geared investment.
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Leah Jay are more than property management specialists – our team includes our specialist Investment Services team who can help you realise your property investment ambitions and discuss if a positively geared property is right for you.
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