What Is Positive Gearing?
What is positive gearing? Positive gearing is investing in such a way that the income you generate from your investment is greater than the total of the expenses that your investment generates.
What Is Positive Gearing Compared To Negative Gearing?
Negative gearing is different in that the goal of negative gearing is to actually lose money on an ongoing basis in the hopes of making more than you have spent when you sell the property. When investing using a negative gearing strategy you are losing money now (and getting a tax break on that money) in order to make money through capital gains later.
The majority of property investors in Australia use a negative gearing strategy for a number of reasons. Firstly, it is more difficult to find investments that generate a positive return before capital gains. Secondly, making money through capital gains can be extremely lucrative.
If you invested $10,000 on the stock market and got a 10% return on your money you would make $1,000. However, take that $10,000 and invest in a $100,000 property. Let’s say that property also gets a 10% return. You have now made $10,000. Even if you we negatively geared $5,000 for that year you have still made 5 times more than if you were unable to leverage your money.
However, you can generally only access your money in two ways.
1. By selling – You then have to pay some fees and you miss out on any future capital gains
2. By borrowing against the equity – You can then keep the property and take advantage of ongoing capital growth.
NOTE: Even if you invest in positively geared properties that generate you income, you can still experience good capital gains on your properties. Also, by investing in positively geared properties the properties will pay for themselves regardless of how much money you make at your day job.
What Is Positive Gearing Compared To Positive Cash Flow?
Positive gearing exists only when income is greater than your expenses before tax is taken into account. Positive cash flow is created when you run at a loss for the year before tax is taken into account. You can then claim those losses and other depreciable assets and get a tax refund on your total loss. If, after you receive this tax refund, your expenses are less than your total income from the property then you are cash flow positive. Read more on positive gearing explained.
How To Make A Negatively Geared Property Positively Geared
You can make a negatively geared property into a cash generating investment in two different ways.
1. By decreasing the expenses – Your biggest expense is likely to be your mortgage. If you can negotiate a better interest rate, or if you can pay down some of the loan and thus minimise your repayments then you can help move your property from a negative to a positive cash flow situation. Moving from a principal and interest loan to an interest only loan can also help to decrease your outgoings.
2. By increasing your income – Increasing your rental income above that of the expenses will also turn your property’s cash flow situation around. You can increase your rental income by fixing up the property or even just in alignment with market rents.
Eventually if you can purchase enough properties that are positively geared then they can completely replace your wage. This makes you financially free. So really the answer to the question “What is positive gearing?” is: “An opportunity for financial freedom”…isn’t that something worth pursuing?