Have you found many positively geared properties, or are they hard to find?
NOTE: Positive cash flow properties may be negatively geared, however when tax savings are taken into account (money lost plus asset depreciation) the property can generate a positive cash flow over the course of the financial year.
Unfortunately there is no easy answer to say whether positive geared properties are a good investment or not, and it is difficult to determine whether or not they are a better investment than negatively geared properties.
The reason being is that the value of an investment depends on the person purchasing the property and the investment goals they have. If the investor has the goal of generating a passive income then the rental income they receive above their expenses can generate them a healthy passive income. In fact you can generate enough passive income over time to completely replace your income.
Some people however, love their job and earn a lot of money. They instead want to minimise their tax and focus on getting as much money through capital growth as possible. These people may wish to focus on newer properties in high growth areas (even if they are negatively geared) because of the tax benefits and the money they can make through capital gains.
So properties that generate a positive cash flow and properties that are negatively geared can BOTH be great investments. It really depends upon the investor and their investment goals. On the other side of things they can both be BAD investments depending on the specific property bought and the way the investor manages the property.
The major advantage of positive geared properties is that they can generate a passive income for you that can replace some of all of your income. This can be great if you can’t afford to service an expensive loan because the rent will pay your mortgage repayments FOR YOU! This is also great as it can allow you to purchase as many properties as you can afford because you don’t have to worry about how much money the investments will cost you each month. With positive cash flow properties the more properties you can afford to buy the more money you will have in your pocket every month.
Time has shown us that, generally speaking, not only do property prices go up over time but rents also go up over time. I bet that you are paying more rent today than your grandparents paid 50 years ago. If you own positive geared properties then over time your income can go up and up over time. This is because your income goes up as the rent you receive increases, but your major expense (your mortgage) stays the same.
This can be very exciting the more properties you own. For example, if you owned 10 different positive cash flow properties and rent on each property went up by $10 every 12 months. Then every 12 months your income will increase by $100/week or $5,200/year (minus your increased expenses such as management costs and increased rates due to inflation). This means that over time you can become richer and richer just by increasing your rents. It is great because some one else is paying off your mortgage for you and you will still have money left over to play with!!!
A lot of so called ‘investors’ and financial planners who focus on negative gearing talk down about positive geared properties saying that they are a waste of time because they don’t generate good capital growth.
To me this is a bizarre statement with not much (if any) backing data. I don’t understand why people assume that a property will only go up in value if you lose money on it every month. I would much rather generate money every month AND make money through capital gains rather than lose money every month in the hope of making money when you FINALLY sell. And that could be 10 years down the track. Do you really want to be paying money out of your own pocket for 10 years before you get anything back?
The problem I see with negative geared properties is that you have to work hard just to keep them. The more properties you buy the harder you have to work to service the loans. Negative gearing strips your cash flow and ties you to your job. If you lose your job then you can’t afford your properties. But with positive gearing, your properties put money in your pocket and if you lose your job your properties can feed you and keep paying for themselves all at the same time.
Positive cash flow properties are seen to not generate good capital gains because often they are bought in regional areas. Regional areas, though they still go up in value, tend to fluctuate in value a lot more as the supply and demand can change so quickly. However, not all positive cash flow properties have to be in regional areas, they can be in inner city areas or even in the suburbs of capital cities (if you create them). Even if they are in regional areas you can still generate good capital gains over time.
Plus it is likely that you could purchase more properties if they make you money every month (opposed to if they lose you money every month) so even if you achieve less capitals gains on each property (say 4% per year instead of 10%) you could still generate more capital gains overall because you can afford to service more loans and thus purchase more properties.
If you buy is a good area and you buy a good property then your chances of achieving capital growth can be quite high. Buy smart in the beginning and you will be rewarded over time.
Negative geared properties are everywhere. This is because it is easy to lose money on an investment. However, it is a lot more difficult to make money on an investment.
In Australia, negative gearing is rewarded by the government and investors are given a tax break on their losses. Some people say this increases house prices compared to rental costs and thus negative gearing is ripe. Even without this, positive geared properties are in high demand and thus attract more buyers. More buyers means more demand and this rises the price, the higher the price the lower the rental yield and the less likely a property is to be positively cash flowed. Thus these properties can be hard to find, not impossible……but hard.
I promise you these properties do exist and there are lots of them out there. Once you learn how to find these properties you can really find a lot of them.
There aren’t so called ‘negatives’ to positive geared properties but there are some risks and some problems that people get themselves into. I will just highlight a couple that are common so you can be aware of these and so hopefully you can avoid these.
Buying Far Away From Home – Buying away from home is not necessarily risky but if you fail to take care of the way your property is managed then this can cause problems. Because you are far away if your property gets damaged, vandalised or becomes empty and needs to be ‘revamped’ your distance can make it difficult to sort out these problems quickly. The longer the leave the problems the worse they are likely to get. But this can be avoided by having a good management team and by fixing problems as they arrive and not letting them get worse.
Buying In A Bad Area – Again not necessarily risky unless your property is poorly managed. Bad areas mean increased chances of theft, vandalism and damage to your property. Take care when choosing your rental manager and again fix problems quickly as they occur.
Not Calculating All Expenses – This is a risk for a lot of people! Most people just calculate rental income and mortgage expenses and fail to allocate money towards paying your rental agent (generally 6-10% or rental income), paying council rates, water rates, maintenance on the property, vacancies, strata and not to mention the possibility of interest rate increases on your mortgage. When buying a property you need to be aware of ALL the expenses first. Then you can truly see what the cash flow of the property will be. To do this you can use our cash flow calculators.
Risk of Vacancy – Risk of vacancy is also a problem you should take into account. There is a reason why banks only account for 80% of rental income and that is because at times properties are vacant. Vacancy rates vary from area but there are a few simple things you can do to reduce your chance of having a vacant property. Keep your property in good condition and don’t overprice it compared to the market, properties in a median price range (as opposed to really expensive and really cheap properties) tend to be more popular and thus remain vacant for less time.
As you can see there are some risks, but these common risks can be easily avoided by buying a good house in a decent neighborhood and staying on top of the management of your property. Sometimes bad things to happen, but if you stay on top of things and buy well these problems are very rare.
How Can You Determine Whether Or Not A Property Will Generate A Positive Cash Flow?
There are a few things you can do to determine whether or not a property you are interested in will be positively geared.
Firstly, you can use the quick test. This test determines whether a property is likely to be positively geared or not. You take the total price of the property and remove the three last numbers (eg for $300,900 you would remove the last 900 making your figure $300) you then times this number by 2 ($300×2 = $600) and if the rental income of the property is around that figure then it is likely it will produce a positive cash flow. This is a very simple test and not 100% accurate but if gives you a good idea of how likely a property is to generate you a positive cash flow. You can use this calculator for free and more calculators just go to my list of property calculators.
A more complex (but more accurate) way to determine whether or not the property in question is likely to produce a positive cash flow is to calculate all of the income from the property (usually just rental income) and then minus all your expenses (eg. mortgage payments, agent commissions, maintenance, council rates etc). I have a calculator for this also, just go to our calculators page and click on the Property Analyser calculator. With this calculator all you have to do is punch in the price, the rent and your expenses and it will instantly spit out your weekly and yearly cash flow.
If your investment goals include generating a passive income (that you don’t have to work for) so that you can quit you job and do whatever you want then positive geared properties are going to be a good option for you to think about. If you want to work hard at your job so you can pay your mortgages and only eat baked beans for 10 years so you can (hopefully) cash out big when you sell the property then negative gearing will probably be more your style.
Ok that was a bit of an over exaggeration about negative gearing but for some people that is exactly what they do.
What I am trying to say is that you need to work out your investment goals and what you want to achieve. What is you ‘end goal’. You end goal is a precise number (either in monthly income, cash in the bank, property value or equity owned) that when achieved you know you have ‘made it’.
For a lot of people they want to earn enough monthly income from their property (above expenses) to fund their lifestyle indefinitely. This is a good goal and if you achieve this goal then you will have achieved financial freedom. If this is something you want to achieve then find out how much per month you need to live off and add maybe 20% and that is your end goal.