While many people go into property investing thinking their investment will be an instant source of cash flow, this isn’t always the case.
As with any choice relating to an investment property, investors need to weigh up the pros and cons of each approach, in line with their individual investing goals.
Depending on the net income earned from a property, an investment property can be neutral, positively or negatively geared.
What is a neutral cash flow property?
Neutral gearing is when the income earned from an investment property is the same as the total expenses. These expenses may include mortgage repayments, maintenance costs, property management fees and other ongoing costs associated with owning an investment property.
Is a positively geared cash flow the right strategy for me?
A positively geared property is where you receive a higher rental return than the outgoing expenses. Therefore, the property will have a positive cash flow, and as the owner, you will pay tax on this income earned.
Positively geared = property earns more than it costs to own.
This situation usually occurs when rents are high, and interest rates are low, especially for multiple income properties such as duplexes or homes with a granny flat.
Positively geared properties can be challenging to find in highly desirable areas. They may experience slower growth than negative cash flow properties. Some investors have been left with properties that are decreasing in values from buying in economically unstable locations, even though they were ‘promised’ a positively geared property.
Why buy a negatively geared property?
By contrast, a negatively geared property has a rental income which is less than the outgoing expenses, including deductible losses. Therefore, the property investor is making a cash loss on their investment.
This cash loss can be used to offset any income received, such as a salary. Therefore, an investor with a negatively geared property will be required to pay less tax to the Australian Taxation Office. In other words, negative gearing a new property can turn an investment into a neutral or positive cash flow scenario.
What strategy is best?
For any investment, it is about finding the best strategy that suits your situation. Property investment is always about the location, but ‘cash is king’! Do your research and consult with a trusted adviser who can help you set up the correct structure to secure a growing investment.
Note: Did you know with interest rates being so low, we are now seeing most properties we present have a neutral cash flow. This is prior to submitting the quantity surveyor’s report (necessary to receive tax benefits) which in turn, provides our clients with solid positive cash flow (after-tax). If you would like more information please call the team at Triple Zero Property on 1300 897 000.Please send me more information about neutrally geared properties
Disclaimer: The content of this document is not to be considered specific advice. Your situation is specific and individual; as such, you should always consult a registered and qualified professional within a particular area of advice needed.