Positive gearing is where the yearly rental returns from an investment property is greater than the yearly outgoings. A positively geared property is defined as one where the rent received from your investment property is greater than the costs of owning it, including interest rate repayments and maintenance expenses.
Positively geared properties can be very beneficial in helping advance your wealth creation plan, as in addition to potentially high rental yields you have the added benefit of being able to use the cash flow from positive geared properties to fund the acquisition of additional investment properties.
In most situations investment properties are expected to earn either a good rental return or good capital growth. It is a rare occurrence for a property to yield both, so there are different strategies that can be used depending on what the property is likely to bring in returns.
For most positively geared properties you may need to purchase at a lower initial investment, which has an impact on the location and long term capital growth.
Getting a positive return on your investment may be an initial part of your wealth creation strategy in order to assist you with future investment purchases, so the capital growth of the property may not be as high a priority as gaining an income.
However, property experts note that positive gearing could be tricky because it relies on the rents being high in comparison to the purchase price of the property. Cheap properties paying high rents tend to be thin on the ground and therefore payment of a large deposit on the property is usually required to push it into the positive zone.
If construction of an investment property commenced after 19 July 1985 you are entitled to depreciation allowances that will enable you to claim “paper losses” to reduce your taxable income.
There are many benefits with a positive gearing strategy for your real estate investments, some of these are listed below.
For detailed information it is recommended that you should seek the advice of a financial planner with expertise in investment property or a qualified accountant.
As with any real estate investment, prospective investors should always apply the fundamental rule of buying the right property in the right location at the right price. With capital growth as the ultimate goal for any property investment these three elements are vital to your success.
More information on negative, positive and neutral gearing is available in our free information pack
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