As interest rates continue to fall, there has been more and more talk about the concept of positive gearing.
Simply put, when a property is positively geared, it generates more income than it costs to hold.
Most property investors are faced with a number of costs that come with owning a property. The most obvious costs are the interest repayments on your mortgage. However, there are also a number of other expenses that need to be factored in when calculating how much money your property is making you each week, month or year.
These costs include repairs and maintenance, strata fees, council costs, land taxes and even periods of vacancies. On the flip side, the income is based on how much rental income your property receives. If the income is more than the sum of the expenses, you have yourself a positively geared property.
For the most part, positively geared properties are not that common given the high costs that usually come with owning property. They are also far less common in the major cities such as Sydney and Melbourne, where house prices are high and rental yields are low.
Advantages of Positively Geared Properties
The real advantage of owning a positively geared property is that it makes you money every month.
Instead of owning a property that costs you money every month, a positively geared property is effectively another source of income.
Positively geared properties are also great for investors who are looking to build large property portfolios. Invariably, if an investor holds a number of negatively geared properties, it is only a matter of time until their serviceability runs out and obtaining finance will be incredibly difficult.
Disadvantages of Positively Geared Property
The main disadvantages of a positively geared property are that you need to pay tax on the income. Contrast this to many Australians who are able to access tax deductions, if their rental properties are losing them money each year.
Equally, there is a belief that most positively geared properties are located in less desirable areas. Some of these locations tend to have lower capital growth potential than properties located in popular metropolitan areas.
However, there are a number of regional areas that are currently experiencing very high demand and strong growth, which suggests that there is no rule of thumb that says metro areas are always stronger.
There are several different types of properties that might be positively geared, such as those containing granny flats, dual-income proprieties such as duplexes, or those in regional locations or even mining towns.
Buying a positively geared property is perhaps easier than it has ever been, given the low level of interest rates.
However, it’s important to weigh up your buying decisions based on a range of factors, including the potential for capital growth, the type of tenant you want and your overall investment strategy, instead of chasing income alone.