Property investment is a go-to wealth creation strategy in Australia. Many investors enjoy “positively gearing” a property. With positive gearing, rental incomes pay for overall property and maintenance expenses, and monthly profit is positive.
By positively gearing your property, you can maximise your cash flow, reduce your mortgage, and make your financial position a whole lot less stressful. It isn’t a speedy wealth creation scheme, but with careful planning and consideration for fundamentals, it can become a profitable wealth creation tool in the long term.
Let’s have a quick glance at positively gearing your property, beginning with location selection through smart expense planning.
1. Learn About Positive Gearing
Positive gearing occurs when your income earned through your investment property (mainly through rentals) surpasses your overall expenses, including your:
- Mortgage Payments
- Insurance
- Maintenance
- Council Rates
- Property Management Fees
You make a profit each week or month, and your opportunities to create savings or invest in yet another asset become brighter.
To many property investors in Australia, positive gearing will become less stressful simply because it reduces the use of one’s own funds in financing property expenses. Having a guaranteed monthly cash flow is an attraction, particularly when interest rates rise or if any nasty expenses occur that one hadn’t planned for.
However, don’t forget that getting a positively geared property will sometimes require careful investigation, level-headed thinking, and sound negotiation techniques.
2. Understand the Perks of Positive Gearing
Positive gearing carries a range of specific advantages. For one, it creates continuous cash flow. As long as you collect more in rent than you spend in outgoings, you build a buffer fund. That extra cash can cover any unplanned property expenses or downtime.
Secondly, lenders will perceive a positively geared property in a positive manner, especially if your desire is to expand your property portfolio. If you plan to expand your property portfolio, having a positively geared property on your books can help you borrow funds for additional properties because you appear more financially stable.
Finally, positive gearing doesn’t overstrain your living budget. You won’t have to dip into your savings to fund your property, so you can enjoy your current living expenses and build an asset at the same time.
If your property appreciates in value over time, you might also enjoy a capital gain, adding further to your wealth.
3. Get the Best Location
One key to a positively geared property is selecting a location with high rental demand and strong rental yields. Regional areas in Australia can sometimes provide higher rental returns compared to capital cities, although certain pockets of major cities may also offer solid yields if you know where to look.
Consider suburbs with:
- Strong Employment Rates
- Proximity to Transportation
- Local Amenities
- Planned Infrastructure Developments
Areas near universities, hospitals, or large shopping centres often attract stable rental demand.
Research similar properties in your target suburb to see their rental prices and occupancy rates. Look for signs of population growth, such as new housing developments and job opportunities. When a location shows signs of expansion and improvement, property values and rental demand often rise in tandem.
4. Do the Maths
Positive gearing isn’t a case of charging a high week-by-week rent. All your expenses must be kept low enough for your margin to have a profit over.
- First, budget for all your ongoing expenses: mortgage payments, council rates, water (if you pay them as a landlord), landlord’s insurance, property manager’s fee, and maintenance.
- Next, work out a fair price for your rent by comparing similar nearby properties. Be careful when estimating your rent for future fluctuations in the marketplace.
- If you set your rent at the high end and the market dips, you risk extended vacancies, so make your price competitive, considering your competition in your locality. Pricing your property a little below your competition can win you long-term, reliable tenants and sometimes less vacancy and less advertisement cost.
A consistent, albeit modest, positive cash flow is better than a theoretical, high-dollar return offset by long vacancy gaps.
5. Secure a Suitable Mortgage
Your mortgage structure plays a huge role in determining whether you can positively gear a property. An interest-only loan can reduce your monthly outlay because you only pay interest rather than principal repayments during the initial interest-only period.
However, you should be aware that once the loan reverts to principal and interest repayments, your costs will rise. If your rent doesn’t increase proportionally, you might lose your positive gearing status.
Alternatively, a principal-and-interest loan might help you pay off the property faster. This approach gives you the chance to build equity more rapidly, though your monthly repayments will be higher.
Whichever structure you choose, ensure you can handle rate fluctuations. If interest rates increase, your mortgage costs rise, and your positive cash flow might shrink or vanish unless your rent also goes up.
6. Keep an Eye on Taxes
Although positive gearing generally means you’ll earn a profit each year, you’ll need to budget for additional tax obligations.
In Australia, rental income is taxable. When you’re positively geared, you can’t claim a tax deduction for a net loss as you would with a negatively geared property – because there isn’t a loss to claim. However, you can still deduct expenses like property management fees, repairs, depreciation on certain items, and the interest portion of your loan.
Careful record-keeping ensures you stay compliant and claim every valid deduction. Consult a tax accountant who understands the Australian property market and investment regulations. Proper guidance can help you maximise deductions, remain legally compliant, and plan for possible changes in tax policy.
Furthermore, if you’re interested in securing a mortgage without hassle overseas or in Australia, use our free FinancePassport service to simplify the process.
7. Monitor Continuing Costs
Positive gearing isn’t a one-off when you purchase your property. You will have to maintain your expenses below your earnings through rentals.
Begin with a routine maintenance schedule. That minor maintenance performed early can save a costly overhaul down the line. Properties in a sound state will have high-quality tenants, and high-quality tenants will pay for your property and care for your property long-term.
Review your mortgage regularly to see whether refinancing can save your fee and interest payments. Furthermore, bargain with your insurance companies to make sure that you’re not overcharging for landlord coverage.
You can also renegotiate property management fees if your agent has handled your property for a long time with minimal issues. Even incremental savings, like a small interest rate cut or a discounted insurance premium, can maintain your positive cash flow.
8. Expand with Caution
Once you experience success with a positively geared property, you might consider purchasing another. Positive gearing puts you in a stronger position to borrow for a second investment because you have an income-producing asset rather than a loss-making one on your credit record.
However, don’t rush into expansion before you confirm that your first property is truly stable. Ensure you have enough cash reserves and that you understand local markets in any new location.
Diversifying across different states or property types can spread risk, but only if you have a solid financial cushion.
Conclusion
Positively gearing an investment property in Australia promises immediate cash flow and a strategic path to long-term wealth creation. This approach reduces the strain on personal finances, helps you qualify for more lending options, and supports a more robust property portfolio.
However, positive gearing isn’t automatic – thorough research, careful budgeting, and a proactive management style determine how well your property performs.
