Published on October 23rd, 2017
Positive gearingNegative gearing gets a lot of press, but you don’t have to negatively gear in order to benefit from an investment property. In fact, if you can achieve a positively geared property it can make life much easier, as it takes the pressure off the household budget and puts money straight back into your pocket.
What is it?
Positive gearing occurs when the rental yield is larger than the costs associated with running the property. While it is not unusual for a property’s rental yield to meet the mortgage repayments, for a property to be positively geared means that rent must exceed all associated costs, including strata fees, repairs, rates and the like.
Do I want one?
Landlords pay tax on rental income and deduct expenses relating to the maintenance of the property. If a property is positively geared, the owner will incur a tax liability.
While many owners view the opportunity afforded by a negatively geared property to reduce their tax liability favourably, positively geared properties have the obvious advantage of actually increasing your annual income. Negative gearing reduces your tax liability, but only at your marginal tax rate. That is, the tax saved won’t outweigh the actual expense.
If you’re running close to the margins of your household budget, you may prefer not to outlay money on your investment property at all. That’s where a positively geared property comes in. These will put money in your pocket at the end of the day, but do be aware that they are typically slower to yield good capital returns.
How do I get one?
Barring unforeseen circumstances, all properties become positively geared over time. Rental yields rise with inflation, but your mortgage repayments go down as you pay down the principal, which means that eventually, your rental return will exceed your outgoing costs. Other factors that contribute to a positively geared property include depreciable assets, which become fully depreciated over time and will no longer be a deduction.
If you don’t want to wait that long, though, there are still ways to achieve a positively geared property right off the bat. To do so requires research and a willingness to go outside the major urban centres.
Regional centres and country towns can offer rich pickings for positively geared property. Purchase prices are a lot lower than in the capitals, and rental yields are often more generous. Look for towns where the population is stable or growing, and where there are a range of industries so that you can be assured of continuing high demand.
Another way to achieve a positively geared situation is to look for properties that can be subdivided. A four bedroom house might not bring in a rental price that meets ongoing costs, but if you can split it into two two-bedroom duplexes, the yield goes up. Always check with the local council before buying this sort of property to see if you’ll be allowed to subdivide.
Buying a cheaper run down property and then doing an inexpensive renovation is another possibility. Run the numbers to make sure you’ll come out ahead, but if you can keep costs down, you’ll be in positive cashflow territory before you know it.
Always seek professional advice before going ahead with an investment purchase. And remember, if you really can’t find a positively geared property, time is on your side!