There are frequently two trains of thought when looking at investment property, Positive Geared or Negative Geared.
Contingent on the advice you receive, your individual financial, you may opt for a negative geared investment in order to off-set a tax liability. Regardless of current news articles regarding the future of negative gearing in Australia, this method of property investment is tried and tested and has been quite effective.
Positive gearing occurs when you receive more in rental income from your tenants than what you pay on the likes of loan repayments, interest, property maintenance, management fees, rates etc. This tends to happen at times when rents are high due to strong demand for rental property and low interest rates.
Negative gearing is a form of financial leverage whereby an investor borrows money to acquire an income-producing investment property and expects the gross income generated by the investment, at least in the short term, to be less than the cost of owning and managing the investment, including depreciation and interest.
Property investment must also be about wealth creation and not just creating a burden on existing cash flows. Negative gearing has been proven to work well, if you are making a tax loss but a cash profit, this is where depreciation will assist to negate the cash profits in order to minimize the tax liabilities. A Positive Geared property is an investment that covers all costs associated with holding and maintaining the property, and these costs are required to include 100% debt finance on all entry costs, council rates, management fees, and other various other holding costs. Once all of this is done and dusted, if there is still money left over, then the property is truly “Positively Geared”.
It is often seen that the more potential for capital growth the more negatively geared a property will become. This is recognized by the yields or return on investments people are prepared to accept.
Clients have to be careful as often the sums are done on interest only loans and larger deposits (hence smaller loan repayments). Whilst they may produce a positive cash flow there are a number of costs that are not being fully accounted for.
There is a massive difference between owning a single investment property and a portfolio. Too often people are lead into investment properties which they cannot afford and the capital growth does not enable them to reach their goals. Each property is different and your situation will be different from the next.
Contact Attribute Property today discuss your strategy.