What is a positively geared property?
It’s the property that generates income which is greater than your interest and other expenses. For eg the rental income from the property is $600 per week and the costs to own and maintain it in terms of loan repayments, council rates etc is $550 per week. The property generates a positive cashflow of $50 in this scenario and is termed as positively geared property.
Why positively geared property?
A positively geared property has the following benefits:
- Positive cashflow or passive income: A positively geared property provides you with a steady income stream as mentioned above. The more positively geared properties you have in your portfolio the more passive income you can generate every month which can replace some or all of your income from regular sources.
- Less cash flow risk: As a positively geared property pays for itself, you don’t need to make your mortgage payments from your regular income or savings. Also, you don’t have to consider selling the property under pressure if your financial circumstances change.
- Easier lending. The property becomes an asset instead of a liability because with additional positive cash flow boosting your income, it becomes easier to secure the loan.
- Increased income overtime: Over a period of time with the increase in property prices, the rental income also increases thus increasing your passive income from a positively geared property. Since the mortgage expenses remain the same, with an increase in rental income, the savings or the income in your pocket also increases.
Positively Geared Properties or Negatively Geared Properties??
There has always been an ongoing debate on whether positively geared properties are better or negatively geared properties.
Some ‘investors’ believe that negative gearing properties are better as positively geared properties don’t generate good capital growth. Their assumption is that a property increases in value if you loose money on it every month and thus in the long run say after 15-20 years it would generate money when sold.
On the other hand investors going for positively geared property believe in making money every month through positive cashflow rather than losing money on the property in the hope of making money after 15-20 years.
Negatively geared properties are hard to maintain as you need a steady source of income to pay the mortgages on them. It reduces your cash flow and bounds you to your job or the steady source of income. The more properties you have the more difficult it becomes to make your repayments.
Whereas a positively geared property takes care of itself by paying of the mortgage through the rental income. It also adds money in your account after paying off the expenses related to your property. You do not need a steady source of income to maintain a positively geared property. They generate good capital gains if they are bought in good areas.
Investment goals and Positively geared properties?
A lot of people want to earn enough monthly income from their property (after expenses) to fund their lifestyle indefinitely. This is their investment or end goal as they want to achieve financial freedom. To achieve this they invest in positively geared properties.
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 this becomes your investment goal to buy multiple positively geared properties.
In nutshell, If you want to generate passive income to an extent that you can quit your job, retire early and enjoy your life without worrying about money or mortgage repayments, then your investment goal should be to buy positively geared properties. It is the most effective way to achieve your objective of financial freedom.