Positive Gearing: A Guide to Investing in Property
Investing in property can be a great way to build wealth, but with so many different strategies and options available it can be hard to know which route to take. Positive gearing is one option that can be an attractive choice for many investors. In this blog post, we'll provide an overview of positive gearing, what it is, how it works and the advantages and disadvantages of this type of investment. We'll also provide some tips on how to get started and the potential risks involved. We hope this guide will help you decide if positive gearing is the right option for you when it comes to investing in property.
What is Positive Gearing?
Positive Gearing is a term used to describe a situation where an investor borrows money to purchase an investment property, and the rental income from the property is greater than the costs associated with owning and maintaining the property. This means that the investor receives a positive cash flow from the investment and is able to use this money to pay off the loan.
Positive Gearing is a popular investment strategy in Australia, and is especially attractive to those looking to invest in property. It can help investors to build wealth in a relatively short period of time, and can provide a steady income stream.
When considering Positive Gearing, it is important to understand the risks associated with investing in property. This includes the risk of rising property prices, vacancy rates, and changes in rental income. It is also important to consider the costs associated with buying and owning a property, such as stamp duty, legal fees, and loan repayments.
It is also important to understand the tax implications of Positive Gearing. When you invest in property and receive a positive cash flow, you may be liable for income tax on the rental income. Additionally, the interest payments on the loan may be deducted from your taxable income. It is important to speak to a qualified financial planner or accountant to understand the tax implications of Positive Gearing.
When considering Positive Gearing, it is important to do your research and understand the risks associated with investing in property. You should also ensure that you are comfortable with the amount of debt you are taking on, and that you have a plan to pay off the loan in a timely manner.
Benefits of Positive Gearing
Positive gearing is a strategy used by investors to increase their wealth in the long-term. It involves borrowing money to invest in a property and earning an income from rent that exceeds the cost of the loan. This results in a net gain, or positive cash flow, for the investor.
The benefits of positive gearing include:
1. Tax Benefits: Positive gearing is a great way to reduce your taxable income. The rent you receive is taxed at your marginal tax rate, while the interest paid on the loan is tax deductible. This means that you can potentially pay less tax overall. It’s important to remember that capital gains tax may still be payable if you make a profit when you eventually sell the property.
2. Low Risk: Positive gearing is a low-risk investment strategy. The loan is secured by the property itself, meaning that you have a real asset that you can use as security. This reduces the risk of defaulting on the loan and keeps the investment relatively safe.
3. Long-Term Returns: Positive gearing can be a great way to generate long-term returns. The rental income you receive from the property is usually enough to cover the cost of the loan, and any surplus income can be used to pay off the loan or put towards other investments.
When considering positive gearing, it's important to think about the potential returns from the investment. Does the rental income cover the cost of the loan, or will you need to use your own money to cover the costs? It’s also important to consider the costs associated with owning a property such as rates, insurance, and maintenance.
Finally, it’s important to remember that positive gearing is not a get rich quick scheme. It takes time to build up a portfolio of properties and it may take years before you start to see a return on your investment. It’s important to have a long-term approach and understand that there may be periods of time where you don’t earn any income from your investments.
How to Calculate Positive Gearing
Positive gearing is a financial strategy in which an investor borrows money to purchase a rental property and then uses the rental income to cover the costs of the loan. It is important to understand how to calculate positive gearing in order to make an informed decision about whether this investment strategy is right for you.
First, you must calculate your rental income. This is the income you receive from tenants in rent payments. It is important to remember that this is not your net rental income, as it does not take into account any expenses related to the property, such as property taxes, insurance, and maintenance costs. Once you have calculated your rental income, you can then move on to calculating your loan costs.
Your loan costs include the principal and interest on your loan, as well as any other fees associated with it. It is important to understand what type of loan you have, as this will affect the total loan costs. For example, if you have an adjustable-rate mortgage, your loan costs will be different than if you have a fixed-rate mortgage. Additionally, you must factor in any additional costs associated with your loan, such as private mortgage insurance (PMI) or points.
Once you have calculated your rental income and loan costs, you can then calculate your positive gearing. This is the difference between your rental income and your loan costs. If your rental income is greater than your loan costs, you are positively geared. This means that the rental income you receive from tenants is covering the costs of your loan, and you are making a profit from the property.
It is important to remember that positive gearing is not always a good investment strategy. It is important to consider the risks involved, such as the possibility of vacancies or changes in the rental market, as well as the potential tax implications. Additionally, you should always seek professional advice before making any financial decisions.
Risks Associated with Positive Gearing
Positive Gearing is an effective way to increase your income and invest in property. But, as with any type of investment, there are risks associated with it that you should be aware of before making a decision.
The first risk is liquidity. Property investments can be relatively illiquid, meaning it can take a longer time to sell a property than to sell a share or other asset. If you need to access the money quickly, it can be difficult to do so.
The second risk is leverage. Positive Gearing relies on taking out a loan to fund the investment, so the amount of debt you have to service increases. If the rental income isn’t enough to cover the loan repayments and other costs associated with the property, you may find yourself in financial difficulty.
Thirdly, the property market can be volatile. Prices can rise and fall quickly and if you have a loan against your property, you could end up owing more than the property is worth.
Finally, there is also the risk of tenants not paying their rent on time, or at all. This can result in you not being able to cover your loan repayments and other costs associated with the property.
Before investing in Positive Gearing, it is important to consider the risks involved and ensure you have the financial capacity to take on additional debt. Make sure you do your research, look at the potential returns and understand the market. Speak to a financial adviser to ensure you make the right decision for your situation.
We understand you and we want to help
We hope this blog post has helped you understand what Positive Gearing is and how it can be used to help you invest in property. At Ello Lending, we are passionate about helping our clients achieve their dreams of homeownership and financial freedom.
If you have any further questions about Positive Gearing or investing in property, please don't hesitate to contact us. We'd love to help you get started on your journey to financial success.
