Positive Gearing is where the rent you earn is more than the costs (unlike negative gearing where the costs are higher than the rent).
This can be great if it happens – but rare.
The following are a few examples of positive gearing:
1. Negative Geared property growth over 10 years or 20 years
Just quickly – to follow through the 1 bedroom for $300,000 example.
In 10 years I mentioned that it could grow to $350,000.
This is actually pretty conservative (only growing at 1.6% per annum). Previously they have mentioned that property has grown at 7% average per annum which would result in value of $590,000!!
So lets assume that the property does OK and is worth $425,000 (growth of about 3.6% per annum). Lets assume the rent is now $425 a week ($22,100). Less interest (just to make the example positive we will assume interest rates have dropped to 6%) $16,200 and $4,000 costs (same).
So now you have a profit of $1,900. Pay tax at 30% ($570) = $1,330 cash in your pocket.
2. High Rental Yield/Low Interest Rates
Some times the rental yield makes the net amount positive (e.g. $450 rent on a $300,000 property). This can happen in regional areas or mining towns however is getting harder and harder to come by.
3. Large Deposit
If you put in a large deposit you will have less interest and property will become profitable more easily.
Tax On Net Rental Income
Unfortunately with positively gearing – you have to pay to at your marginal rate. It is always better to pay tax and have profits than to have losses.
But what if you could have both? Save tax and have profits (see Part 3 – Positive Cashflow).