How To Positively Gear An Investment Property in Australia
Positive gearing is a simple philosophy: make more money than you spend on your investment property. However, gearing your property so that it actually generates a surplus is anything but simple. It takes time, effort and a lot of planning.
According to the ATO, only 40% of investment properties in Australia are positively geared. So, what’s the secret to creating a positive cash flow? Below, we explain how to consistently secure a net profit on your properties and get the most out of a positive gearing investment strategy.
What is Positive Gearing?
Positive gearing is an investment strategy whereby the ongoing income on an investment property is greater than the ongoing expenses, creating a positive cash flow. Positively geared properties yield consistent returns that can be used to pay down loans quicker or reinvest elsewhere.
Positive gearing is generally seen as a lower risk investment strategy than negative gearing, which involves making a loss on a property that can later be claimed as a tax deduction.
This is because positive gearing yields more predictable profits, and surplus income can serve as a buffer to interest rate hikes, increased home loan repayments and other unexpected costs.
Is Positive Gearing Right for Me?
Most financial advisers recommend new investors pursue a positive gearing strategy, rather than a negative gearing strategy. There’s no one-size-fits-all solution, however; any decision you make should fit with your wider financial strategy.
As an expat, you should be considering your tax obligations back in Australia, risks associated with changing interest rates and your retirement plan when deciding whether or not to pursue positive gearing as an investment strategy.
How Do I Positively Gear an Investment Property in Australia?
The first step to positively gearing an investment property is securing a competitive home loan with manageable repayments. It then takes time to create a positive cash flow, though this process can be accelerated by increasing rental income, reducing property expenses and paying off your mortgage faster.
Below, we’ve listed the five key steps to positively gearing your investment property in Australia
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1. Find a Positively Geared Property
If you haven’t yet purchased your investment property, the best thing you can do is use positive gearing in your search. If you can find a property that’s likely to produce a positive net rental yield (where income is greater than expenses), then you’ll have already done the hard work.
Conduct thorough research on prospective investments and don’t be afraid to ask agents and owners for information on expenses, as this will help you calculate the likely net rental yield.
Bear in mind that most properties in Australia fail to make a net profit from the jump, so don’t be too prescriptive with net rental yields during your property hunt.
2. Secure a Competitive Home Loan
Once you’ve landed your property, the next step is to negotiate a competitive home loan. The aim is to find a loan with relatively low monthly repayments that don’t make too much of a dent in your expenses.
This, of course, means finding a mortgage with a low interest rate. However, don’t neglect other fees, such as Lender’s Mortgage Insurance (LMI), which can also add up quickly.
To find the right home loan, seek professional advice from a qualified mortgage consultant. At Odin Mortgage, we have access to the widest range of expat mortgages in Australia and can connect you with a home loan plan that will help you achieve positive gearing on your property.
3. Increase Rental Income
While you might be satisfied with your investment property’s current rental income, there’s always room to squeeze out some more. Growing the market value of your property will allow you to charge more rent. Increasing your number of tenants will likewise add to income.
Here’s a list of ideas for adding to your rental income:
- Build an extension
- Make renovations
- Subdivide the property
- Rent out the granny flat
- Reduce vacancy rates
- Apply for government grants
Some of these suggestions carry their own expenses, which you’ll need to factor into your budgeting.
4. Reduce Expenses
Along with increasing rental income, you’ll also want to keep expenses to a minimum. Only spend on your property when necessary and always shop around for the best rates.
There are lots of ways to limit your expenses:
- Secure affordable insurance
- Find an estate agent with competitive rates
- Carefully screen tenants
- Get tenants to pay for utilities
- Perform maintenance yourself where possible
- Keep inventory reports
Be frugal, but in moderation. There will be times when you really do need to get your wallet out to keep tenants satisfied, otherwise you could lose them.
5. Be Patient
Not all properties will yield a profit from day one. In fact, very few do. It can take months or even years to positively gear an investment property. Provided that you’ve followed the previous steps, there isn’t much else to do other than sit tight and be patient.
Often, the combined effect of inflation and increased housing demand will see your rent naturally increase over time. When the market changes, move with it; don’t hesitate to increase rent if the demand is there.
As you pay down your mortgage, your required repayments on your home loan are also likely to become smaller. If you can pay it early, even better: this will save you money on your loan’s interest.
Paying off your mortgage as soon as possible will help you cut expenses significantly and further tip your property into positively geared territory.
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How Do You Work Out if an Investment Property is Positively Geared in Australia?
To work out if an investment property is positively geared, you first need to add up all expenses associated with the property over a given period, which includes costs like strata levies, council rates and maintenance, and then subtract this sum from the rental income. If the result is positive, the property is positively geared.
How Much Tax Do You Pay on Positively Geared Investment Properties in Australia?
Rental income generated by a positively geared investment property forms part of your assessable taxable income, and will be taxed in line with your personal tax rate. For example, if your marginal tax rate for the year is 32.5%, you’ll be taxed 32.5% on any rental income.
For expats, any rental income you make on properties in Australia will be taxed by the ATO, with rates starting at 32.5%.
Use the five-step process outlined above to empower your positive gearing investment strategy. Remember to look for properties with positive net rental yield potential, negotiate a competitive home loan, increase rental income, reduce expenses and, above all, be patient.
The last step is arguably the most important. Positively gearing an investment property in Australia takes time; don’t panic if you aren’t generating a surplus within the first month. With careful planning, the profit will come.
We also suggest talking to a mortgage broker to help you find a home loan that fits your investment strategy. If you’re an Australian expat looking to invest back home, start the process with Odin Mortgage today to secure a loan that aligns with your financial goals.