Property investment does not have to be a negative experience. Having the returns cover or exceed the costs can bring benefits, particularly when it’s time to sell.
Accentuating the positive
“Are you positively gearing?” It sounds very like the sort of question I used to loudly ask my grandmother on those rare occasions, 30-odd years ago, that I would agree to let her drive me (as opposed to the other way around) to the local supermarket in Sydney when my parents would head overseas and leave me to play granny-sitter, if not always granny-chauffeur.
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Like cooking the best roast lamb and pavlova on Earth, and playing bridge at a national championship level, crunching the gears was, bless her, one of her outstanding talents.
These days, of course, the same question tends to come up more often at dinner parties among the aspiring property investment set and I’ve been surprised of late at just how many people are choosing positive over the perennial tax-saving favourite, negative gearing. I was interested, for example, to read in the latest Australian Property Investor magazine the number of entrepreneurial property players who have used positive gearing in their – evidently successful – quest for wealth.
According to API, a couple of property investors in Cairns have built a portfolio of 36 properties worth more than $5 million, including more than 15 units and even three blocks of units. All of them are positively geared.
Unless you’re a driving instructor or terrified grandson in the passenger seat, positive gearing is where the income from an investment property exceeds the costs of owning it, including interest on borrowings, maintenance and so on.
The trouble is, with the price of property the way it is in most metropolitan and even regional centres, and with borrowing costs on the rise, identifying properties where you can produce positive cashflow is becoming a bit of an art. Achieving rent higher than your mortgage payments and body corporate fees is no mean feat given how hard it is to find cheap property. But, as the couple in Cairns have shown, it can be done. They’ve done it by buying and furnishing one-bedroom units and renting them to backpackers short-term.
The benefits of generating positive cash flow are really only realised when you sell the property for significant capital gain at some stage in the future.
The folks at the Honey Finance Group explain: “To generate a positive cash flow, investment costs must be lower or equivalent to the income received from the property, taking into account your rental yields combined with tax breaks. If construction of an investment property commenced after July 19, 1985, you are entitled to depreciation allowances that will enable you to claim ‘paper losses’ to reduce your taxable income.
“This is because you won’t have to subtract the losses incurred over the life of the investment, as is the case with negatively geared properties.”
So before you borrow to the hilt so you can negatively gear, it might be wise to have a chat with your financial planner to see if being positive about gearing could work better for you.
To read more Simon Lloyd blogs, click here.