How to Positively Gear an Investment Property in Australia
The basic idea of positive gearing is to ensure that the income generated from your investment property exceeds the expenses. However, achieving a surplus from your property is a challenging task. It requires careful planning, dedicated effort, and significant time.
According to the Australian Taxation Office (ATO), only 40% of investment properties in Australia are positively geared. Therefore, it is crucial to understand how to consistently generate a net profit and maximise the benefits of a positive gearing investment strategy.
In the following paragraphs, we will discuss the secrets to achieving a positive cash flow from your investment properties.
What is positive gearing?
Positive gearing refers to an investment approach where the revenue generated by an investment property surpasses the expenses, resulting in a favourable cash flow. This type of investment provides steady returns, which you can utilise to repay loans faster or reinvest in other ventures.
Compared to negative gearing, where an investment property incurs a loss you can claim as a tax deduction, positive gearing is considered a less risky investment strategy.
Positive gearing generates profits, and the surplus income can function as a cushion to protect against interest rate increases, unexpected expenses, and increased home loan repayments.
Is positive gearing right for me?
Financial experts generally advise novice investors to adopt a positive rather than a negative strategy. However, no universal approach suits everyone, and choosing a method should align with an individual’s broader financial plan.
As an expat, one should consider their tax responsibilities in Australia, potential risks related to fluctuating interest rates, and retirement plans while contemplating whether to adopt positive gearing as an investment strategy.
How do I positively gear an investment property in Australia?
The first step to achieving positive gearing on an investment property in Australia is to obtain a home loan with cost-effective repayment options.
While generating a good cash flow takes some time, specific measures can speed up the process, such as increasing rental income, cutting down on property expenses, and making accelerated mortgage payments.
In summary, here are the five crucial steps to positively gear your investment property in Australia.
1. Research and find a positively geared property
If you still need to acquire an investment property, it is advisable to incorporate positive gearing in your search.
Suppose you identify a property with the potential to generate a positive net rental yield where the income surpasses the expenses. In that case, you have already accomplished the most challenging work.
While searching for prospective investments, conducting comprehensive research and requesting details on costs from real estate agents and owners is crucial. This information will help in estimating the potential net rental yield.
It is essential to note that most properties in Australia do not generate a net profit immediately, so it is advisable to be flexible with net rental yield requirements during your search.
2. Secure a competitive home loan
After acquiring your property, the subsequent step is negotiating for a competitive home loan. The objective is to discover a loan that necessitates relatively low monthly payments, which do not significantly impact your expenses.
This goal is achievable by obtaining a mortgage that has a low-interest rate. Nonetheless, recognising other charges, such as Lender’s Mortgage Insurance (LMI), is crucial, which can accumulate rapidly.
It is advisable to seek guidance from a qualified mortgage consultant to identify the appropriate home loan. At Odin Tax, we have access to Australia’s broadest selection of expat mortgages. We can facilitate your connection to a home loan program that enables you to achieve positive gearing on your property.
3. Boost your rental income
Although you may be content with the rental income from your investment property, there is potential to increase it. By raising the market value of your property, you can justify charging higher rent. Additionally, adding more tenants will increase your income.
Several ways to increase your rental income include:
- Building an extension.
- Subdividing the property.
- Renting out a granny flat.
- Reducing vacancy rates.
- Applying for government grants.
However, some of these ideas come with costs. You must consider them carefully when planning your budget.
4. Reduce management expenses
In addition to raising rental income, it is essential to minimise expenses when managing an investment property. Spend money only when necessary and look for the most competitive rates available.
There are various methods to reduce costs, such as finding affordable insurance, selecting an estate agent with competitive fees, carefully screening tenants, having tenants pay for utilities, performing maintenance tasks yourself whenever possible, and keeping inventory reports.
However, it is also important to exercise moderation when being frugal. Sometimes, spending money is necessary to keep tenants happy and prevent them from leaving.
5. Wait patiently to generate profits
Not all investment properties will immediately generate profit. Most take time to become positively geared. If you have followed the previous steps, there is nothing else to do except wait patiently.
Over time, rent may naturally increase due to inflation and increased housing demand. When the market changes, it is crucial to adapt and adjust rent prices accordingly if there is a demand for it.
Your home loan repayments will likely decrease as you pay off your mortgage. Paying off the mortgage early can save you money on interest and significantly reduce expenses. That will help move your property towards the positively geared territory.
Patience is the key to success in positive gearing
Follow the five-step process described earlier to strengthen your positive gearing investment plan. Remember to search for properties with potential positive net rental yield, negotiate a competitive home loan, increase your rental income, reduce expenses, and, most importantly, be patient.
The last step is the most critical. Achieving positive gearing for an investment property in Australia requires time. Don’t be alarmed if you aren’t generating a surplus in the first month. With proper planning, the profits will come.
We also recommend seeking the assistance of a mortgage broker to help you locate a home loan that suits your investment strategy.
If you’re an Australian expat interested in investing back home, begin the process with Odin Tax today to obtain a loan that aligns with your financial objectives.
Frequently asked questions
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.
The Australian Taxation Office (ATO) considers the rental income produced by a positively geared investment property part of your taxable income. You will need to pay taxes according to your tax rate. If your marginal tax rate for the year is 32.5% of the property value, the ATO will tax you at 32.5% on any rental income.
For expats, any rental income from properties in Australia will be subject to taxation by the ATO, with rates starting at 32.5%.
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