Everything You Need to Know About Positively Geared Properties in 6 Simple Tips
Have you wondered about positively geared properties? This is a term used to describe real estate investments that deliver a positive return.
But there is more to know than just that. If you’re looking to invest or develop real estate, you need to learn as much as possible about the topic.
Here at Little Fish, we have a saying: knowledge is power, but it’s also money. No one gets into property investing or property development to lose money. We all want to turn a profit, put food on the table for our families and hopefully develop a nice cushion of funds for when the unexpected happens.
This helpful article will share everything you need to know about positively geared properties in six simple tips. Read on to discover more.
Why Invest In Real Estate with a Townhouse?
You’d choose to invest in real estate by buying a townhouse for a few reasons.
One primary reason is that property investment creates a stream of passive income. Passive income is defined as not having to go to work or exchange your labour for money.
For instance, dividends paid by companies you hold shares are an example of passive income. Rental yield is also passive income, staying within the context of this informative article.
Let’s break it down some more. The median rental price for a property in Melbourne is $460 a week. That’s $1840 a month or $22,080 a year. That’s a significant boost to your main income stream. You need to deduct property management fees and maintenance and repairs to the home.
But suppose your property returns a positive income balance at the end of the financial year. In that case, it’s considered to be positively geared. This term is used for taxation purposes, as you’ll need to pay income tax on the profit.
There are a few reasons why real estate is a sound investment compared to other investments. For instance, the stock market is a volatile beast, as the 2008 Global Financial Crisis showed. If you have money tied up in shares, you can risk losing it if the market crashes or a company folds.
Whereas real estate property tends to appreciate in value in most cases. This means that if you buy a house for X dollars within five to ten years, it should be worth more. Investing in real estate generates wealth via appreciation and provides a passive income source.
Side note – Rentvesting is another viable option, of course. What is rentvesting?
Positively Geared Properties – Why a Townhouse is a Safe Bet
Still wondering about positively geared properties? This section will discuss buying an existing townhouse as an investment.
When deciding what type of property you’ll invest in, you must choose between apartments, units, townhouses and houses.
Apartments tend to be the cheapest, but they are also the riskiest. Apartments don’t tend to appreciate in market value as much as units, townhouses and houses do.
Also, they can have significant issues, such as flammable cladding and poor construction. They can sometimes require major capital works that all owners must contribute to. We don’t recommend investing in an apartment.
However, a townhouse is an excellent choice of investment for you. There are a few reasons why. Let’s explore them now.
Depending on the property developer, a townhouse can have four or five bedrooms. That’s a significant draw card for families who want lots of bedrooms. Developers often build townhouses in booming suburbs, so many local appeals exist.
You can buy a townhouse close to schools, kinders, daycares, parks, leisure centres, shopping strips, major shopping centres and more.
Furthermore, a townhouse is often cheaper to maintain in a good state than an older house. Old houses are prone to requiring frequent repair and significant renovations. For instance, restumping and rewiring, all of which cost a lot of money.
A newly built townhouse won’t require significant repairs or renovations for twenty years.
Develop Townhouses for Positively Geared Properties
Now let’s talk about another approach to positively geared properties – developing land to build townhouses.
Developing land requires you to either own a block of suitable land for development or purchase a suitable lot. Identifying the right block is a whole process, which we don’t have time for today, but you can read more about it here.
Once you have your land, you must acquire all the relevant development plans and permits. This is a lengthy process, so you must prepare everything and get your ducks in a row.
The benefit of developing townhouses for positively geared properties are many. For instance, if you build two townhouses on one block and subdivide the land, you will gain two separately titled properties that you can benefit from.
You may wish to sell one property, which depending on your numbers, could see you net a tidy sum. Then, you can rent out the other property for passive income and positively gear it as you aren’t making a loss on the investment.
The rental income should cover your mortgage when developing the land. In some cases, it will be profitable too.
How Much Tax Will I Pay?
We like to say here at Little Fish that you shouldn’t feel bad about paying taxes. If you’re paying more tax, it means you’re earning more money, which is something to celebrate.
You can think of the tax man as a silent business partner in your investments. You get your cut, and he gets his share at the end of the day.
The amount of tax you pay on positively geared properties will depend on how much you earn from it and what tax bracket you’re in based on your income from employment, your own business, and your other investments that pay a positive return.
How Does the Property Market Influence Positively Geared Properties?
The existing property market has a significant impact on positive gearing. It tends to be more prevalent when interest rates are lower, or there is strong rental demand. We are currently in a situation where interest rates are higher, but there is still strong rental demand.
So it’s still possible to positively gear properties.
As rental demand is high, landlords can demand more rent for their properties. It is a delicate balance, though, because if you demand too much, you might struggle to find tenants to lease to. Ultimately, the market will decide if your rental price is fair.
There are some other benefits to positive gearing, which we’ll discuss now.
Positive gearing means more money in your pocket, which you can use where you need and want. For instance, once your mortgage repayments are met, and other living expenses are met, the leftover is available as disposable income.
You can fund a holiday, renovations to other properties, or invest it elsewhere.
There is also less risk to your cash flow, so you don’t have to scramble to find the cash to pay for other expenses.
Furthermore, you may find that you have an easier chance of securing finance with a positively geared property, as lenders will assess all your income streams when determining eligibility for finance. This means getting a car loan or a personal loan is more accessible.
The Downsides to Positively Geared Properties
There are some drawbacks to this investment strategy. Let’s discuss them.
We’ve mentioned the tax component, which, as we said, should be viewed positively. Another is that there is sometimes less potential for capital growth compared to negatively geared properties, but this depends on your circumstances.
Another final drawback is that you can struggle to find a property with positive gearing potential in some markets.
Seek Professional Advice
Suppose you’re in a position to consider investing in property with a view to positive gearing. In that case, you should consider consulting with a financial advisor or planner. They can provide expert advice tailored to your individual circumstances.
This might cost some money initially, but they can set you up with a strategy to generate wealth and empower you with financial independence.
Positive Geared Properties – A Conclusion
This helpful article has shared everything you need to know about positively geared properties in an easy-to-follow format. We’ve covered six simple tips that should help you decide if this is a viable investment strategy for yourself.
There are risks and drawbacks, as with any investment, so it’s best to be armed with all the knowledge in advance. Remember – knowledge is power, but it’s also money.