The goal of Positive Gearing is to achieve greater rental returns, and to achieve a return on investment without relying on long term capital growth, Positive Gearing means your property is making a profit right now.
Most property investors are very familiar with the concept of Negative Gearing an investment property to obtain a tax deduction on the expenses. The ongoing losses from a negatively geared investment property are tax deductible, which can be used to reduce tax liability from other income. The net effect of this is to boost your profit and return on investment at the expense of the tax man. However it does rely on the capital growth in the property value to outstrip the accumulated losses. Whilst in the past this may have been a relatively common occurrance, with a volatile financial climate this is far from certain, and capital growth is not guaranteed.
What is Positive Gearing?
Positive Gearing occurs when the rental income from an investment property is greater than the expenses, including the loan interest. This generates a positive cash flow for the investor, which can then be used to support further investments. Effectively, a well selected property with a high rental return can achieve ongoing profits for the investor. There is no reliance on an external source of income to generate the tax deductible benefits – the property investment is self-supporting.
Positive Gearing vs Negative Gearing
Negative Gearing relies on another source of income to offset the losses generated by the negatively geared investment. Positive Geared investments produce a positive cash flow on their own.
The Benefits of Positive Gearing
Positive Gearing does not rely on the ability to achieve a capital growth over the course of the investment.
Positive Gearing does not rely on the continued availability of Government Tax Breaks for losses on these types of investments.
Positive Gearing generates it’s own cash flow, which can then be used to fund other developments.