Positive gearing is a strategy that involves owning a rental property that generates more income than it costs to run, resulting in a positive cash flow. This can be a great option for first-time investors who want to reduce their risks and take advantage of low interest rates. In this article, we will delve deeper into the advantages and disadvantages of positive gearing to help you decide whether this strategy is right for you.
Advantages of Positive Gearing.
Extra Cash Flow:
One of the primary advantages of positive gearing is the additional cash flow generated by the property. This additional income can be used to supplement your existing income or to cover the costs of owning the property, such as mortgage repayments and maintenance expenses.
Boosts Your Serviceability:
A positively geared property can also improve your serviceability and increase your chances of getting approved for another loan. When you have a property that is generating income and covering its own expenses, banks will view you more favourably and be more likely to lend you money.
Positive gearing can also provide you with financial security in case of any unforeseen circumstances. If the market conditions change for the worse or you experience personal setbacks, a positively geared property can help you weather the storm without having to sell the property.
Ability to Invest in Multiple Properties:
Positive gearing can help you build a property portfolio faster as the extra cash flow generated by the property can be used to fund the deposit for a new property. This can help you take advantage of market conditions and diversify your investment portfolio.
Disadvantages of Positive Gearing.
Losing Out on Tax Benefits:
When you have a positively geared property, the income generated by the property is taxable, meaning you will not be able to claim tax benefits that come with negative gearing. This can be a disadvantage for some investors, especially those who rely on tax benefits to make their investments profitable.
Lower Capital Growth:
Positive gearing can result in slower and lower levels of capital growth, particularly if the property is located in a regional area. This is because these properties tend to have lower rental yields but higher capital growth rates. As such, if you’re looking for high capital growth, positively geared properties may not be the best option for you.
The profits generated by a positively geared property can be quite modest, particularly when you consider the tax implications. This means that investors should not expect to make a significant profit from a positively geared property and should instead focus on the additional cash flow generated by the property.
When Should You Consider Positive Gearing?
Whether or not positive gearing is the best option for you will depend on your investment goals and risk tolerance. Positive gearing is a good option if you are looking for additional cash flow and want a lower risk option. This is particularly true for first-time investors who are just starting out and may not have a lot of capital to invest.
On the other hand, if you’re looking for high capital growth and are willing to take on more risk, then negative gearing may be a better option for you. Negative gearing involves owning a property that generates less income than it costs to run, resulting in a net loss. This net loss can be used to offset other income, reducing your taxable income and resulting in tax benefits.
Positive gearing can be a great option for first-time property investors who are looking to reduce their risks and take advantage if the interest rates are low. The benefits of positive cash flow properties include extra income, better serviceability when applying for loans, and financial security in times of market changes or personal circumstances.
However, it is important to weigh the disadvantages of positive gearing, including the loss of tax benefits, the risk of buying low capital growth properties, and the relatively slim profits.
If you’re considering positively gearing your property, it is essential to do your research and make sure it aligns with your investment goals. Whether you choose to positively gear or negatively gear your property, PRD’s team of experts can help you make informed decisions to Lease Smarter. Contact us today to learn more about how PRD can assist you..