Positive cash flow vs. negative gearing explained

Posted on Friday, December 4, 2015 - 10:51

If you’re thinking about getting involved in property investment, you might have stumbled across terms such as positive cash flow and negative gearing. Every property investor might have asked himself/herself – what should I opt for, negative gearing or positive cash flow? This article presents you with a good understanding of these two particular investment options, so keep on reading.

Positive cash flow

Positive cash flow is a more conservative and increasingly safer investment alternative. It implies receiving more rent from tenants in comparison with what you have to pay in loan repayments, interest, maintenance and other additional costs. This is most likely to happen when rents are particularly high, given the strong demand, and when interest rates are rather low.

For instance, a property that is priced at $400.000, situated in an area in which rental prices are quite high, will imply an appreciative rent of $590.00 per week. The repayments costs are $457.00 per week, which allows you to make a profit of $132.50 per week.

Advantages

  • Significantly higher income – the main advantage of positive cash flow is that you can make the payments the property encompasses, without having to get money out of your pocket.
  • Less risk – be it the case your financial situation alters or you lose your job, you won’t have to sell the property at short notice because the rent will allow you to pay for the costs it implies.
  • Lender attractiveness – if you wish to ask for other personal loans, your positive cash flow will increase your chances of having them approved.

Disadvantages

  • Significantly slower long-term increase – a positively geared property is less likely to present significant capital growth in the long run.
  • Taxability – your income will be taxed, similar to your other incomes.

Negative gearing

A negatively geared property is a property that presents higher costs than the income it produces. As this particular investment alternative might predict a possible future loss, it is quite risky. Still, it is assumed that this loss can be anticipated from your taxable income.

For example, a property that is priced at $400.000, and is situated in a stable area that is expected to perform better in the long run, the rent costs are increasingly more affordable; let’s say the rent is appreciated at $420 per week. The repayments cost associated with the property are approximative $457.50 per week, which brings you with a shortage of $37.50 a week. This particular situation means your property is negatively geared. You might ask yourself if there are any possible advantages to this investment. Let’s take a look.

Advantages

  • More affordable – the costs of the rent are significantly lower, which will make the property more appealing to tenants.
  • Tax deduction – this is the main advantage that comes with negative gearing – it allows you to claim tax deductions related to your additional expenses of the property.

Disadvantages

  • Long-term strategy – you cannot anticipate what the future brings, you might work on a long-term strategy, but things might alter on the road. • Greater financial risk – be it the case you are no longer able to pay the additional sum associated with the property, you have to make sure you have a plan B prepared if this happens.
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