What is a Positively Geared Property?
Simply put a positively geared investment property is one that’s incoming rental return is higher than your loan repayments and outgoing costs. A positively geared investment property will provide you with income from both the rent generated by the property and if the property has increased in value when sold.
Why is Positive Gearing Good?
If you’re making more from rental income than the cost of owning the property, your investment will be self-funding and will benefit from the capital growth of the property. A positively geared investment property will provide you with ongoing cash flow.
Positively gearing your investment property is beneficial if you don’t have sufficient cash flow to offset rental income losses while you own the property.
Positive gearing is considered a conservative investment strategy.
Why is Positive Gearing Bad?
If you positively gear your investment property you are exposing yourself to potential tax you will need to pay on your net income.
What is a Negatively Geared Property?
In contrast to positive gearing, negatively gearing your investment property means that the money you’re generating through rental income is less than your outgoing costs to own the property, including loan repayments and other expenses. On the surface, it appears that you are making a loss from owning the property.
Why is Negative Gearing Good?
If you have the ability to absorb the initial income loss, the loss will be offset by the reduction in your taxable income and potentially regained if you sell the property for a capital gain.
Why is Negative Gearing Bad?
Unless you have the excess cash flow to cover the cost of owning the property, you may be exposing yourself to ongoing losses of that won’t be recouped in the short term.
Negative gearing is considered a higher risk investment strategy as you’re banking on your property’s value growing enough to offset the initial losses before you choose or need to sell.
Positively Geared vs Negatively Geared Perth Investment Properties
Many investors choose to negatively gear their Perth investment properties to offset the tax they would usually pay on their income, with the expectation that the capital growth of the property will provide them with an overall gain.
In a time of low property value growth or even decline, like Perth is in right now, negatively gearing an investment property has increased the risk that the value of your property will not overcome the initial cashflow losses and you may be forced to sell without making an overall gain on your investment.
In addition to decreasing property values in Perth, interest rates are currently at record lows, meaning your outgoing cost could be lower than ever, tipping the scales towards positively gearing your investment property.
“The gap between rental yields and home loan rates has narrowed dramatically, so landlords are now in a better cash flow position than they were a year ago when the yields were 4.14 per cent” said Tim Lawless, research director at CoreLogic.
Positively gearing your investment property can provide you with an ongoing cash flow to further invest in other properties, but you need to be prepared for the potential tax due for your overall income.
When it comes to accessing your Perth investment property strategy you also need to review your circumstances because what works for one investor may not be beneficial for you. An important factor when choosing your property investment strategy is your separate income and what you can afford to lose initially to potentially regain long term.
Each investor needs to find a balance between cash flow and capital gains from your investment properties. You also need to consider the length of your investment and if you are looking to make a profit quickly or if you have the ability to plan a long term investment and capitalise when property prices are increasing.
Get Advice from Perth Investment Property Experts
As all the advice in this article is general in nature, we advise seeking professional financial advice about your Perth investment property strategy.
Whether you choose to negatively or positively gear your Perth investment property, you’ll need to ensure your property is tenanted and producing rental income. This is where the experience and highly accredited team at Benchmark Property Management can help out. We’re a leading Perth property management agency that works with property investors to maximise returns that suit their investment strategy. Contact us today to discuss how we can help you profit from your investment property.
Disclaimer: Information for this article was sourced from the Australian Securities and Investments Commission (ASIC), the Smart Property Investment website and Positive Real Estate website. All information provided is for are for general informational purposes only and are not intended to provide specific financial advice or recommendations for any individual or on any specific security or investment product. It is recommended that you should not use this information to make financial decisions and that you seek professional advice from a financial adviser or someone who authorised to provide investment advice.