Take advantage of positive gearing

Take advantage of positive gearing

There are a raft of calculations to carry out when planning to take out a home mortgage. Every facet of your income and outgoings needs to be assessed and sorted through to ascertain just how much you can afford on the repayments.

While this whole process is certainly manageable, especially if you use a helpful mortgage calculator, how can the entire investment be made more sustainable? Well, the answer lies in positive gearing.

A positively geared property is one that makes more money than its outlay.

What is positive gearing?

Positive gearing is a term most commonly used by those who are pursuing properties for investment purposes. Research from BNZ suggested that a positively geared property is one that essentially makes more money than its outlay.

The most common form of this is a home or apartment that accrues money from rent. This income then adds up to more than the outstanding loan. On Property pointed out that this is widely known as a 'cash flow property', as it can essentially act as a supplementary source of income for its owner.

Alongside that, there are a number of other benefits that typically accompany a positively geared investment property:

  • Limited risk if personal circumstances change as the income from the property should pay for itself in the short term.
  • The positive return can be used to balance out a wider investment portfolio.
  • The additional income can make it easier to meet the obligations of the outstanding loan, potentially boosting the investor's credit score.

Are there any downsides?

Like any investment, there are things to be aware of when aiming to take advantage of positive gearing. It may sound like a win-win situation, but there are a number of downsides that can occasionally come into play.

It's important to consider the amount of income a positively geared property generates, as this is taxable. Consequently, if the calculations are wrong, a positively geared investment may not actually be profitable after the authorities have taken their share.

Moreover, a sound positively geared investment property can be hard to come by in some areas. With the inflated prices of property in city centres in particular, it may not be possible to make a positive return even when any incoming rent is considered. Simply, location plays a big part in the success of a positively geared investment property.

Home loans and positive gearing

As touched on, if you're buying a property to live in, positive gearing may not be the priority. For example, National Australia Bank (NAB) pointed out that capital gains on homes may be more important - and ultimately become increasingly profitable - when it compounds over time.

Positive gearing is dictated by generating income, so it may not be high on your list of financial considerations if you're attempting to secure your dream home and move into it immediately.

However, if you're looking to secure a cheap home loan on an investment property, with the intention of perhaps first renting out and then moving into it at a later date - or vice versa - then positive gearing should come into your thinking.

Ultimately, the whole concept may seem like an attractive one, as it appears as though the property in question will essentially be profitable from day one. However, such houses and apartment are hard to find in sought-after locations, and capital gains can often offer a better return.

Anyone weighing up positive gearing needs to take on board a variety of information including the aforementioned location, as well as how much is likely to be owed in tax, before taking the plunge and signing on the dotted line.

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This information has been prepared without taking into account your individual objectives, financial situation or needs. You should, before acting on this information, consider its appropriateness to your circumstances.

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