Positive Geared Property
There are often two schools of thought when looking at investment property, Negative Geared or Positive Geared.
Depending on the advice you receive, your individual financial situation and the perspective of your advisor, you may opt for a negative geared investment in order to off-set a tax liability.
Whilst the benefits of this have been well documented, it’s the “investing for a loss” strategy that has never really sat well with me.
Investment should be more about wealth creation and not creating a burden on existing cash flows.
Negative gearing can work well, if you are making a tax loss but a cash profit, this is where depreciation will help negate the cash profits in order to minimize the tax liabilities.
So what is a Positive Geared property and how do you know if you have found one?
The purists will say that a Positive Geared property is an investment that covers all costs associated with holding and maintaining the property, and these costs need to include 100% debt finance on all entry costs, council rates, management fees, and other holding costs. Once all the outgoings and holding costs have been paid for, if there is still money left in the bank, then the property is truly “Positively Geared”. This is difficult to find as many investors will off set the positive gearing for capital growth potential. Often the more potential for capital growth the more negatively geared a property will become. This is identified by the yields or return on investments people are prepared to accept.
Property spruikers may take a different view and say that positive geared properties are those that provide an income that covers the cost of the repayments and outgoings. Often the sums are done on interest only loans and larger deposits (hence smaller loan repayments). Whilst they may produce a positive cash flow there are a number of costs that are not being fully accounted for and is this in my view is cheating. But everyone will have different views on this and your position will vary depending on what you want to believe.
Positively geared properties are the key to creating a portfolio and real wealth through property. They’re the difference between owning a single investment property or a portfolio. Negative geared properties drain your cash flow and you can’t afford to continually purchase negatively geared properties, because remember, the aim is to make money not lose it.
Before you look at acquiring one investment property, have a strategy to buy 10, this is not all in one week, but over time. If your strategy doesn’t allow you to own 10, then you shouldn’t buy one.
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