
January 28, 2025
Investing in property has long been a favoured method for building wealth, and positive gearing is a strategy that offers unique advantages. Positive gearing occurs when the income generated from a rental property exceeds the expenses associated with owning and maintaining it. This approach can provide investors with steady cash flow, tax benefits, and the potential for long-term capital growth.
Here’s an in-depth look at positive gearing property investments and how they can be a smart addition to your financial portfolio.
What is Positive Gearing?
Positive gearing occurs when your property’s rental income surpasses its costs, including:- Mortgage repayments
- Property management fees
- Insurance
- Maintenance expenses
- Taxes
Advantages of Positive Gearing
- Steady Cash Flow: Positive gearing ensures a reliable income stream that can supplement your earnings and improve your financial stability.
- Reduced Financial Stress: Since the property generates enough income to cover its expenses, investors don’t need to dip into personal savings to sustain it.
- Tax Benefits: While positively geared properties generate taxable income, you can still claim deductions for expenses such as depreciation, repairs, and maintenance.
- Easier Loan Repayment: The surplus income can help pay down the mortgage faster, reducing the overall interest paid over the life of the loan.
- Potential for Capital Growth: In the long term, the property’s value may appreciate, providing a significant return on investment when sold.
Challenges of Positive Gearing
- Higher Tax Liabilities: Since the income from a positively geared property is taxable, you may face higher tax obligations.
- Lower Capital Growth Areas: Positive gearing properties are often found in regional or less popular areas, which may have slower capital growth compared to metropolitan locations.
- Market Dependence: Rental income depends on tenant demand, and any fluctuations in the rental market can impact your returns.
How to Find Positively Geared Properties
- Research Rental Yields: Look for properties in areas with high rental demand and competitive purchase prices. A rental yield above 5% is often considered favourable for positive gearing.
- Consider Regional Areas: Regional markets often offer lower entry prices and higher rental yields, making them attractive for positive gearing strategies.
- Evaluate Infrastructure and Amenities: Properties near schools, public transport, shopping centres, and employment hubs tend to attract tenants and secure steady rental income.
- Work with Professionals: Engage a property investment advisor, real estate agent, or financial planner to identify opportunities and assess potential returns.
Who Should Consider Positive Gearing?
Positive gearing is ideal for investors who:- Seek immediate cash flow rather than relying solely on long-term capital growth.
- Prefer lower financial risk and self-sustaining investments.
- Have higher incomes and can comfortably manage any increased tax liabilities.
Tips for Successful Positive Gearing
- Diversify Your Portfolio: Balance positively geared properties with other investments to spread risk and maximize overall returns.
- Regularly Review Performance: Monitor your property’s financial performance and make adjustments as needed to maintain profitability.
- Leverage Tax Benefits: Work with an accountant to ensure you’re claiming all allowable deductions and optimizing your tax position.
- Consider Future Growth: Choose properties in areas with the potential for both high rental yields and long-term capital appreciation.