How does positive gearing work?

October, 2017

Are you buying a rental property, but haven’t yet settled on an investment approach? Maybe it might be worth considering a positive cash flow strategy over the more popular ‘negative gearing’ approach.

A positive cashflow strategy (more commonly called positive gearing) is where the rental returns are greater than the outgoings (including interest on the loan, strata levies and insurance). However, positive gearing will only work if a rental home is fully let year in, year out. Also, the main disadvantage with positive gearing is that because you’re receiving extra income, you’ll have to pay more tax.

Negative gearing, in simple terms, is when you borrow money to buy an asset, but that asset fails to generate enough income to cover mortgage expenses and other costs. Any “losses” can then be written off against the income tax you owe at the end of the financial year. However, you must cover the losses yourself. This means you’ll need enough cash flow to tide you over. Plus, running properties at a loss can make wealth creation a slower process.

How to buy a positive geared property?

The easiest way to achieve positive gearing is to buy a property at the lower end of your price range. Then with the help of your Raine & Horne property manager, determine a market rent that covers the interest on your borrowings and other expenses.

To find a positively geared property will involve plenty of research into the suburb or town under consideration. If it is in a city or regional town that your unfamiliar with, check that it has all the essential amenities such as schools, hospitals, shops and leisure facilities that will appeal to tenants. Make sure you consider the health of economy of the area too and the type of tenant that the property will attract to ensure a consistent cashflow.

Before choosing an investment strategy it’s probably best to talk to an accountant about whether you should positively or negatively gear the property.