Positive cash flow or positively geared investment properties…what is the difference and is one better than the other?

Positively geared investment properties

Yes, there is a difference.

Positively geared investment properties are those which essentially pay you to own them.

So for example, let’s say your investment income on a particular property is 2,000 per month and you pay out 1,800 in property expenses.

Then, let’s add to that surplus another 100 for taxes and you have a positive balance of 300 per month on that property.

Put simply, then, positively geared investment properties will provide cash over and above liabilities both before and after taxes are accounted for.

Positive cash flow properties 

Unlike positively geared investment properties, positive cash flow properties are those which are only positively geared after taxes, depreciation, expenses, etc. are deducted from the property’s income.

Which is better?

Quite simply that depends.

It depends upon your personal financial situation, where you’re at in your property investing career and what you hope to achieve.

Consider the following examples of what impact each type of positive cash flow property will have on an investor’s ability to grow their portfolio:

Vinod

Positive cash flow property (after taxes)

• Salary:  50,000 per annum
• Property purchased:  350,000
• Rent 300 per week
• Interest rate: 7% variable
• Property expenses are negative 5,000 per year (pre-tax)

Vinod can recoup her expenses when she files taxes, but if she wants to buy another property her lender might have an issue with her financial situation.

Here’s why.

A lender will typically deduct the property expenses (in this example, 5,000) from Vinod’s $50,000 income which of course automatically impacts her serviceability.

Rahul

Positively geared investment property

• Salary:  50,000 per annum
• Property purchased:  350,000
• Rent 700 per week
• Interest rate: 7% variable
• Positive pre-tax cashflow of +5,000 per annum

Rahul’s lender will count the additional 5,000 annual pre-tax income from his positively geared investment property. This means the lender will use 55,000 per year in their calculations…obviously an improvement for Rahul’s serviceability.

Finding positively geared investment properties

If you have negatively geared properties they can become positively geared investment properties, however what if you want an investment property that’s positively geared from the start?

How do you find positively geared investment properties?

Consider market indicators such as:

• Average time on the market
• Clearance rates
• Discounting rate
• Capital growth rate

Look for:

• High yields
• Strong economic drivers
• Market position in the property market cycle

Positively geared investment properties require growth markets. Look for economic drivers that are strong and find out where the market lies within the property market cycle.

Creating positively geared investment properties

Five things you can do to improve your rental income or your property’s capital growth include:

1.   Manage your debt

• Minimise your bad debt (e.g. credit cards, mortgage on your personal home)
• Debt consolidation

2.   Use tax deductions to gear the property

• Claim depreciation
• Claim PAYG regularly (fortnight, weekly, etc.)

3.   Sell another property and use the capital to pay down/off your investment property’s mortgage

4.   Add value through renovation

5.   Add another income stream to property (e.g. granny flat, multiple tenants)

6.   Refinance

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