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Here is a quick guide to how positive gearing works, including the potential benefits and what to watch out for.
Put simply, a positively geared property (also known as a 'cash flow property') is an investment that generates more in rental income than it costs in loan repayments, strata fees and other expenses associated with ownership.
You may end up with a positively geared property if you’re able to put down a large deposit, reducing the amount you need to borrow and lowering your interest charges, or if you purchase a property during a time of strong rental demand and low interest rates.
As with any investment, it's important to weigh up the possible advantages and disadvantages of owning a positively geared property.
Some of the potential benefits of positive gearing include:
However, there are a few things you may need to account for, such as:
To give you an example of how positive gearing may work in an investor’s favour, let's say you decide to purchase a property for $650,000 located in a regional area, where vacancy rates are low and rental yields are high.
You put down a deposit of $300,000 and take out $350,000, 30-year home loan, with the interest rate fixed at 3.75% for the first three years.
The interest on your mortgage is $13,000 for the first year and you spend an additional $7,200 on other property-related expenses. That’s a total of $20,200 in expenses for the first year. However, due to strong rental demand in the area, you're able to charge $1,000 a week, making an annual rental income of $52,000.
By deducting the total expenses from the rental income, you can see that your property is positively geared in the amount of $31,800.
While this amount counts as taxable income, there is a range of special deductions you can make as an investor to reduce your tax burden.
As always, it's important to take into account your personal situation and any tax implications before buying an investment property. Be sure to consult with your financial adviser to work out the right investment plan for your individual circumstances.