A positively geared property is an asset that will generate more rental income over expenses. These expenses include loan repayments and interest, property maintenance, property management fees, and council rates before tax is payable.
Investors may choose to adopt a positively or negatively geared strategy for their investment property and/or portfolio.
This article will highlight the positive gearing strategy. To read more about the negative gearing strategy read more here.
Case Study
To further explain what exactly a positively geared property is, I have illustrated the calculations below.
If an investor secures an investment property for $500,000.
Say the property has tenants in place paying a strong weekly rental return of $600 per week and assuming all ongoing combined expenses come to a total of $500 per week.
After all combined expenses are paid each week, the remaining weekly positive cash-flow comes to a total of $100 per week.
Should You Adopt This Approach?
Pros
1. Extra Cash Flow. If this strategy is adopted investors will see additional money in their account, which could be utilised for further investment or to make additional payments on properties within the portfolio.
2. Balanced Property Portfolio.
Many investors secure negatively geared properties as they tend to be located in major cities expressing potential capital growth prospects. Unfortunately, negatively geared properties result in a loss of income, so having a positively geared property could assist in the shortfall and balance the overall property portfolio.
3. Risk Profile.
All investments come with risk and careful consideration should always be applied before taking the plunge. A key advantage of a positively geared property is that generally, the property is generating additional income weekly. If an investor's circumstances quickly change, such as a job loss, then having the overall property costs covered by the weekly income could be key to holding onto the property and not having to sell.
Cons
1. Scarcity & Slower Capital Growth.
In a lot of cases, positively geared properties are located in regional or fringe locations, which have historically seen less capital growth compared to the capital cities. These types of properties can also be hard to find as the rental return needs to be higher relative to the property purchase price.
2. Tax Implication.
The income earned on a positively geared property is taxable, which will need to be declared to the ATO.
3. Potential Volatility.
Due to positively geared properties being located in regional or fringe areas, the expected rental returns could be largely dependent on a particular industry of employment and may be prone to greater volatility. Such areas include tourism-based destinations and the resource sector. If employment in these markets weaken it can harm property prices and rental returns.
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Jarryd Gauci – Property Investment Consultant
P: (02) 9939 3249
Disclaimer: When considering purchasing a property, it's always prudent to seek the advice of an appropriately qualified professional to determine which strategy is most appropriate for your individual circumstance.