The goal of everyone investing in property is to make a return on that investment; meaning, to make a profit. While not all investments will be successful or be continually profitable, investing in property is one of the best and safest ways to see a return on investment (ROI). Positive gearing and positive cash flow are two terms you’ll hear a lot of when you research property investing and it’s important to understand what these terms means if you want to make money on your property portfolio.
Types Of Property Investing
Property investing opens up the doors to a number of different possibilities, all of which have the potential to be very lucrative:
As illustrated by the above list, there are quite a number of ways you can take advantage of the real estate market. Some investors prefer putting their money into the commercial sector, such as owning stores or shares in a shopping centre, while others prefer the more traditional approach of buying up houses and apartments and renting them out.
All options can return solid profits. It’s really more about what you’re most comfortable investing your money in and where your interests are.
Why Invest In Property?
Other forms of investing - such as shares, Forex, Bitcoin and so on - are more volatile markets where prices and margins can fluctuate drastically. The reason real estate investing has always been such a staple with many people is because of the stability of the market.
Now while property prices can certainly rise and fall, the general trend is for properties in Australia to increase in value over time, therefore representing a much higher chance of turning a profit from a future sale at the very least.
Another very key reason why investing in the housing market, for example, is so alluring is because investors are able to make a return on investment almost immediately when they rent the property out.
Other forms of investing are far more static, where virtually nothing happens throughout the duration of the investment until you sell the commodity, hopefully for a higher price than what you paid for it.
With property investing you can win in both departments. You can draw rental income now while waiting for the price of your property to increase, then you can sell that property for a tidy profit when the market is favourable.
What Is Positive Gearing?
‘Positive gearing’ is a common term in the world of property investing, but if you’re new to the game, perhaps you don’t fully understand this concept. Let’s take a look at positive gearing and discover what it means.
To put it into simple terms, when you borrow money to invest in the property market, the income you derive from your investment is higher than the amount of money you have to repay to your lender. This includes monthly repayments, interest and fees.
If your investment property is not bringing in more money than you’re having to pay out, then your investment is NOT positively geared.
Let’s look at a very simple example:
You’ve borrowed money to purchase a home as an investment property. The average total weekly repayments you owe on the loan and all other associated expenses equals $600. You then rent the house out for $750 per week. This means your investment is in positive cash flow as it’s making $150 profit for you every week.
This is positive gearing and positive cash flow in basic terms.
Now tax comes into play. Because your investment is turning a profit, you’ll owe tax on that profit, as it’s considered income. The tax rate will vary depending on your overall income level and tax rate.
You’ll also come across the term ‘negative gearing’, which is essentially the opposite of positive gearing. This is where your investment property doesn’t bring in enough income to cover your expenses and you have to use your own money to make up the deficit.
Fluctuating interest rates will also affect profitability, which could see your investment property flowing through periods of positive gearing, neutral gearing (no profit or loss) and negative gearing.
The ultimate goal of every property investor is positive cash flow, and that’s why properties with the potential to be positively geared are so appealing.
It can also depend on what your overall objective is as well, as a negatively geared property in a booming area of a city will fairly rapidly increase in value. This is more of an end game investment, where all the profit is derived from the eventual sale of the investment property.
It’s important to understand what your investment objectives are from the start before you purchase a property in a certain area. If the goal is weekly/monthly positive cash flow, then you’ll want to focus on properties in areas where positive gearing is possible.
What is important is to understand the full financial implications before you jump into an investment property.
What we do at Dwyer Property Investments is prepare a comprehensive financial report taking into account your specific financial situation and the actual proposed property figures. This report clearly shows exactly how each positive the property will be so before you make any investment decisions we show you the exact figures.
Aspects of investing like depreciation, positive and negative gearing are all covered in this financial report.
Investing of any description is a big decision so make sure you do your research, seek help from professionals who work in the business and understand the figures and how they will impact you financial situation.
A well planned, solid property portfolio can create real wealth and will allow you to retire financially independent and secure.
If you would like a free financial consultation or to simply have a chat about whether property investing is right for you, contact me anytime.