While negative gearing is a relatively common concept, positive gearing is less well known. Or perhaps with property prices racing away in most capital cities the notion of positively geared property is simply to abstract to attract too much attention.
But positively geared property is alive and well – if you know where to look.
What is a positively geared property?
To tell if an investment property is positively or negatively geared, you will need to estimate the likely monthly rental income and then deduct all of the costs (before any tax claims or rebates) related to holding the property.
It’s important to ensure that you include all of the direct expenses in your calculations and have a realistic range for rental income.
Unless you already own the property and therefore have some numbers to work with, you will need to estimate both. To work out the likely rental income try and find as close a match to the property that you can – same area, bed and bath numbers and same (or as close as you can get) amenity level.
Real estate portals like realestate.com.au and Domain can be a good way to gauge the monthly rental costs in your target area. Do as much research as you can and get enough numbers to create a range of rental prices. Once you have a sense of the high and low levels for similar properties, pick a number slightly lower than you think is appropriate for your prospective property. This will ensure that you have some wiggle room in your calculation if anything changes in the rental landscape.
Then pull together your expenses. These are relatively predictable, and include costs like the interest proportion of any repayments on the loan used to buy the property, council and water rates, maintenance, insurance, vacancy costs, tenancy advertising costs, and rental management fees. Combine these costs and divide by 12 to get an average monthly fee.
Now deduct the estimated average monthly cost from the estimated monthly rental. If your costs exceed the rent, then the property is negatively geared.
If there is rental income left (that is a surplus) after the costs have been deducted, then the property is considered to be positively geared.
Negatively geared property can help with tax management strategies. Positively geared property has a range of benefits that we’ll touch on later.
Where do I find positively geared property?
The rising prices mentioned earlier have made it increasingly difficult to locate positively geared properties in the major cities. According to realestate.com.au “housing prices (in 2021) have grown at the third-fastest rate in Australia’s history.
Capital city dwelling values surged by more than 20% over 2021, while in the regions, median home prices increased by 25%.” According to Domain, this takes the average price of a house in Australia is around $995,000 with some commentators forecasting a 4.5 – 7 per cent increase in 2022.
The effect of this has been to push the necessary borrowing levels up. With rental yields for city properties at record lows, making your rental income match your outgoings at this level of loan commitment can be challenging.
In response, investors are now looking further afield for investment properties that can strike the right cashflow balance.
Ultimately, finding positively geared property is partly a case of how much you are able or willing to tip in, and then finding investment property opportunities where the rental return is higher than the loan repayments and outgoing direct costs of the property.
At the same time it’s more than a purely financial decision. The simple cashflow equation is entwined with the not-so-simple need to ensure that the investment property still meets the location, convenience and quality needs that make for a good rental income.
We are seeing investors looking closely at house & land in growth corridors and off-market luxury apartments in Melbourne suburbs like Ivanhoe, Richmond and Moonee Ponds, and Milton, Richlands and Newstead in and around Brisbane. One of the benefits of buying off-market is two-fold; firstly the packaging of the deal can be advantageous, and secondly, new property can provide tax deductions that can help deliver tax offsets that can help minimise your taxable income.
If you are looking for positively geared property, look at growth corridors, off-market deals and opportunities to maximise your return through rental return and tax optimisation.