Positive geared properties are defined as properties that generate a positive rental cash flow for owners. These tend to be rental properties that earn a higher amount of rental income as compared to the payable expenses; including mortgage payment, interest, property management costs and property rates among others. It is worth mentioning that the positive cash flow is a gross amount, with the applicable income tax still included.
In most cases, positively geared properties are located in regional areas. This is where demand for rental properties is usually high, while the vacancy rate is relatively lower. Although these properties do attract capital gains, the rate of appreciation is much lower.
Perhaps the main appeal around positive geared properties is that they add more money into your pocket. As previously mentioned above, these properties earn a positive cash flow. This means that as the owner, you get to cover all the necessary expenses and still have some cash left to line your pocket.
Another advantage of investing in positive geared properties is slightly reduced risk exposure. Since positive geared properties can literally pay for themselves, owners are exposed to a reduced level of risk if they were to get into financial troubles. For instance, the net cash earned from the properties can be used for your own upkeep if you were to lose your job.
Furthermore, you would not be forced to sell off the investment under pressure and in unfavorable conditions due to cash troubles. This is because the investment pays for itself.
Positive geared investments also raise the owner’s attractiveness to lending institutions. This is because the lenders view the positive cash flows and reduced risk exposure as favorable.
There is a common misconception that positive geared properties are associated with low capital appreciation. This is mainly because the properties are usually located in regional areas, where property value appreciation rates tend to be relatively lower than those experienced around inner-cities and the suburbs. However, the property values are known to fluctuate from time to time due to the rental demand fluctuations experienced in regional areas.
Although this is true, the rental rates are likely to grow over time, further increasing the positive cash flow amount. This is the case especially considering that the mortgage amount stays constant.
As you can see from the above, positive geared properties have a lot to offer. Their appeal depends on whether their advantages line up with the investors goals.
# Image thanks to Property Investment Newcastle who specialize in positively geared property.