Positive Gearing Explained
Positive gearing refers to an investment strategy where the income from your investment is greater than your expenses before capital gains are taken into account.
This generally refers to property investing, where the rental income is greater than the mortgage and all other expenses. This results in a weekly, monthly or yearly income after all expenses have be paid.
What Are The Major Benefits of Positive Gearing?
There are some major benefits to positive gearing your property investments that negative geared investment don’t offer you.
- You make money from day #1
- You can service more loans and purchase more positive geared property
- Your cash flow increases over time as rents increase
- Capital gains are still achievable
- Someone else effectively purchases your investment for you
- It can create an income that you could potentially retire on
What Is The Different Between Positive Gearing and Positive Cash Flow?
Positive gearing refers to property where the income is greater than the expenses before tax refunds are taken into account. Learn more about what is positive gearing.
Positive cash flow refers to properties that are actually negatively geared (income is less than the expenses) before tax. However, after tax refunds are taken into account the income becomes greater than the expenses.
All positive geared properties are also positive cash flowed, however not all positive cash flow properties are positively geared.
This is because a positive geared property has an income greater than expenses after tax is taken into account (usually tax is paid on extra income) thus it can also be classified as positive cash flowed.
What Is Negative Gearing?
Negative gearing is an investment strategy where you actually lose money on the investment in the short term (through a loss in cash flow) in order to make money in the long term through an increase in the value of the property (capital gains).
A property is negative geared when the expenses are greater than the income of the property. This means each week, month or year the owner of the property has to pay extra money in order to maintain the property.
Neutral gearing refers to property that is neither positively geared or negatively geared. It breaks even in terms of monthl/yearly cash flow so there is no out of pocket expenses but there is also no “into your pocket” income.
How Do I Know If An Investment Is Positive Geared?
In order to know whether a property is going to be positively geared you need to calculate the total income of the property and subtract the total expenses.
Income generally refers to rental income. Expenses include things like mortgage costs, insurance, rental management fees, maintenance, council rates, water and utilities etc.
A quick way to test whether a property is likely to generate a positive cash flow is to do the quick test.
Take the purchase price and double it, then chop off the last three 0’s. If the rental income equals this amount or higher then the property has a good chance of producing a positive cash flow.
We have an online calculator that can do this calculation for you. Check out our positive gearing calculators.
Is Positive Gearing The Right Investment Strategy For Me?
Answer the questions below to see if positive gearing may be a suitable investment strategy for you.
a) Do you want to create financial freedom for yourself and have regular income coming in whether you work or not?
b) Do you want to minimize your risk and make money from day #1?
c) Are you willing to forego potential high growth capital gains and instead focus on increasing your cash flow?
d) Are you willing to spend time learning this new skill and use your spare time to look for properties instead of watching TV?
If you answered yes to the 4 questions above then it looks like positive gearing could be a good investment strategy for you. But always speak to a professional financial advisor before making any investment decisions.
Want To Learn More About Positive Gearing Your Investment Properties?
If you want to learn more about positive gearing investment property then read the below posts or sign up for our Property Investor’s Master Class
Positive Gearing Your Investment Property – 5 Ways To Make Any Property Positively Geared (coming soon)
Positive Gearing vs Negative Gearing – Which Investment Strategy Is Best For You? (coming soon)