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Positive gearing
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Positive gearing
What is positive gearing?
Positive gearing occurs when you receive more in rental income from your tenants than what you pay on the likes of loan repayments, interest, property, maintenance, management fees, rates etc. This is common when rents are high due to strong demand fro rental property and interest rates are low.
What is an example of positive gearing?
For example, an investor purchases a $600,000 property in an area where demand for rent is high. Because of the high rental demand, they can rent the property for a high rent return of $550 per week while their interest and maintenance cost comes to $440 a week. This means this property is increasing income by $110 per week, producing a positively geared return and paying for itself
What are the advantages of positive gearing?
- Increased income
- Less risk
- Lender attractiveness
What are the disadvantages of positive gearing?
- Taxable
- Slower long-term growth: Often, investment properties that produce a positively geared return are located in areas that see less or slower capital growth
- Fluctuating growth: You’re relying on good economic factors including low interest rates, low vacancy rates and even strong employment figures to keep the rent flowing in, leaving you with some surplus gains after costs