Most investors would be familiar with the concept of negative gearing. Indeed, the RBA reported in February 2016 that two-thirds of all investment properties were negatively geared.
But what about positively gearing a property – why is that less popular?
While the benefits of negative gearing (claiming any loss made on the investment property to reduce taxable income) are well known, the benefits of doing the opposite and actually making a profit are often overlooked.
Here are some reminders of why it can be a smart strategy to positively gear your investment property.
What are the benefits of positive gearing?
In basic terms, positively gearing a property means running your investment so it turns a profit. The obvious benefit is that at the end of the financial year there is money left over that contributes to the investor’s overall income position.
While earning a higher income invariably attracts more tax, having more money in your pocket creates greater opportunities. For example:
- Many investment loans are interest only, so while the value of the house may go up, the principal owing on the loan remains the same throughout the life of the interest only period. Being positively geared allows investors the option to use profits to pay down the mortgage principal.
- Relying on capital gains to make a profit can leave investors exposed if the market was to turn and house prices were to drop, so using the profit to pay down the principal can help protect against any change in the market.
- Investors can also use the profits to reinvest in other assets such as shares, additional property or even to do renovations so the property increases in overall value
What are the negatives of positive gearing?
As a general rule, any income you make attracts tax, and income made through a positively geared property is no different. So, be prepared to pay a portion of your yearly profits to the tax office.
In addition to paying tax, managing a positively geared property can also cost you more time and effort. This is because the rental income from long-term tenants won’t be enough to turn a profit, so landlords find themselves having to rent the property out short-term.
While this means you can charge more per night, it also means the property needs more hands-on management.
The property needs to be marketed properly, cleaned after each stay, and you have to manage the booking schedule, not to mention any guest complaints or requests.
What should you do if you want to positively gear a property?
They also provide a bit of help and support to get you set up, so the process is as smooth as possible.
There are also property management companies like Hey Tom that help manage short term rentals on behalf of property investors to help them positively gear the asset.
This can be a good solution for property investors that don’t have time to run the property themselves.