- Positively geared investment properties bring in more rental income than they demand in ongoing costs
- Investors after passive income likely desire a positively geared property
- Many property investments start out negatively geared (costing more than they earn in rent) and slowly become profitable over time
Investment properties can be positively geared (brings in more in rental income than demanding in ownership costs) or negatively geared (costs more to own than it yields in rental income). Generally, most investors who intend to own a property for the long-term want to be positively geared.
Positively geared investment properties: The definition
The actual definition of positively geared investment properties can be broken down by its components: Positive and gearing. 'Gearing' refers to the practice of borrowing money to invest, also known as 'leveraging', while 'positive' means an investor is in the green day-to-day.
In property investment, positive gearing is when you rent out a property that your purchased with a mortgage and the rent you earn from it exceeds the total costs of owning the property (including interest, depreciation, and management fees).
Positive gearing vs negative gearing
As you might have guessed, positive gearing is the opposite of 'negative gearing'. Negative gearing is a contentious issue, largely due to the tax treatment of losses realised on investment properties.
A negatively geared property investor can generally deduct the costs borne from owning said property, not only from the rental income brought in, but also from their other income. And because of Australia's tiered income tax rates, individuals on higher incomes tend to benefit more from tax deductions.
Thus, critics argue that negative gearing tax benefits make the property market less fair for first home buyers and lower income earners, since higher income earners who can typically pay more to purchase homes are more incentivised to do so.
Whether you're pro- or anti-negative gearing, it's important to remember that owning a negatively geared property means making a regular cash flow loss, even if it brings a tax break.
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Positively geared investment properties can offer immediate cash flow, but they aren’t without risk. Unexpected costs, vacancies, interest rate changes, and limited capital growth can impact immediate and overall returns.
Before purchasing, it’s essential to carefully consider your budget, the location and type of property, and your long-term investment goals. Crunch the numbers, understand the potential pitfalls, and ensure you have a buffer to weather market fluctuations.
At the end of the day, a positively geared property can be a worthwhile investment, but only if it fits your financial situation and long-term strategy.
Why do property investors positively gear?
There can be many benefits to a positively geared property, such as:
- Passive cash flow
A positively geared property generates income, helping to boost your budget each month. - Property essentially ‘pays for itself’
Because it’s producing a net profit, investors can often take a 'set and forget' approach to repaying a mortgage on a positively geared property. - Improved borrowing power
Lenders typically view a positively geared property as an asset rather than a cashflow liability, which can make it easier to secure additional loans for future investments.
Case study
Cheryl is looking to buy her first home. She has a budget between $500,000 and $550,000 and is currently renting.
After researching suburbs close to her work, she feels houses she likes are out of her price range. She decides to buy an investment property in an area further outside the city.
She buys a two bedroom property for $529,000 in an up and coming suburb still within 40 minutes of the CBD, putting down a 20% deposit on a 30-year interest only home loan with an interest rate of 5% p.a.
Her estimated monthly interest only repayments are around $1,763 per month and she estimates $600 a month in additional costs, including council rates, management fees, insurance, and maintenance. That brings her total outlay to around $2,360 per month.
Cheryl rents out the property to a young family for $2,500 a month.
This leaves her with approximately $140 of surplus per month, meaning she currently has a positively geared property.
The property generates a passive income, but doesn’t come without risk. There are many factors to consider when exploring the opportunity to positively gear property.
What to consider before purchasing a positively geared property
Investing in property (or anything, for that matter) brings risk. Here are some of the key risks to consider if you're thinking about buying a positively geared investment property:
Unexpected expenses
Repair and maintenance costs can bore a hole in even the most positively geared property investor's pocket, not to mention strata special levies. Just because a property is positively geared now, doesn't mean it will be tomorrow.- Vacancy periods
Rental markets eb and flow and what might be a in demand property now, might not be in the future. If you couldn't afford to own the property were it to remain vacant for a period, you might want to reconsider your position. Interest rate changes
If interest rates rise, your mortgage costs could increase, potentially turning a previously positive cash flow negative.Capital growth limitations
Higher-yield properties, which are easier to positively gear, are rarely in growth markets. While they may provide immediate cash flow, capital growth may be limited compared to properties in lower-yield markets.Management and tenant risk
Dealing with difficult tenants or the time of property management can impact returns. Even hands-off investors may encounter unexpected headaches.
How to find a positively geared investment property
Most rental properties are negatively geared at the time they're purchased. Over time, inflation and rising rents may tip the balance, eventually leading a property to produce a positive cash flow.
Though, it is possible to buy a property that’s positively geared right from the start. Such properties are often found in regional areas, particularly those with weaker or riskier local economies - like 'boom and bust' mining towns. Because capital growth may be limited in these areas, properties typically need to generate positive cash flow to justify investment.
But when interest rates are low and rental demand is high, more properties can be positively geared, as rental income can easily exceed interest and other holding costs.
How to turn a negatively geared investment property into a positively geared one
If you already own a negatively geared property, you might be in a position to transform it into a positively geared investment. There are two ways you may be able to do this:
- Lower your costs
- Increase your rental income
You can attempt one or the other, or both.
Raising the rent you charge might be the simplest option. Though, doing so could discourage tenants or result in the property spending more time vacant than necessary or greater tenant turnover, which can result in higher property management costs.
Meanwhile, lowering your costs could mean swapping to a lower-fee property management firm, revisiting your insurance product to see if you're getting a good deal, or take a significant risk and limit maintenance. Perhaps easier and more effective, though, is to compare your investment property home loan against others on the market and refinance to a lower-rate deal.
Here are some of the most competitive investment mortgage options available now:
Lender Home Loan Interest Rate Comparison Rate* Monthly Repayment Repayment type Rate Type Offset Redraw Ongoing Fees Upfront Fees Max LVR Lump Sum Repayment Extra Repayments Split Loan Option Tags Features Link Compare Promoted Product Disclosure
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Understanding tax on your investment property
Of course, generating rental income via a positively geared property means paying income tax on that revenue. But just because your rental property is operating in the green, doesn't mean you can't make many of the same deductions that a negatively geared investor can.
According to Dr Adrian Raftery, aka Mr Taxman, the costs you can deduct at tax time include:
- Advertising costs
- Mortgage interest
- Bank charges
- Body corporate fees and charges, also known as strata levies
- Cleaning costs
- Council rates
- Insurance (building, contents and public liability)
- Land tax
Dr Raftery told Savings.com.au in 2021 that you can claim a deduction for these expenses only if you actually incur them and they are not paid by the tenant. When unsure, it's important to seek guidance from a professional.