The difference between positively geared and negatively geared investment properties: 27/09/12

Those thinking about investing in property as a way of accruing wealth, have two strategies at their disposal. Generally, it is best to have a combination of the two in order to create a balanced portfolio, and to avoid problems of serviceability with financial institutions.

Positively geared properties are those properties whose rental yield exceeds mortgage repayments and thus, puts money into your pocket. The term ‘cash flow positive’ is also used. This investment strategy is seen as a good way to get your foot in the door of the property market, without the financial burden that is associated with negatively geared properties. Negatively geared properties are the exact opposite of positively geared properties; that is, the rental income received from the property is less than what is owed on the mortgage repayments, resulting in the landlord covering the short fall. This leads to out of pocket expenses for the owner, but is seen as a worthwhile option for those seeking to build long term wealth, as negatively geared properties usually have higher long term capital growth than positively geared properties.

Although both investment strategies eventually result in cash flow and capital growth, the opportunity cost between the two is time. Positively geared properties will give the investor faster cash flow, but slower capital growth, whilst negatively geared properties provide slower cash flow, and faster capital growth. Short term, a positively geared property can give the investor extra money to help with everything from lifestyle, shopping and school fees, but in the long term the capital growth and thus, subsequent equity, will be lower than the more patient, negatively geared strategy. Those who can afford to cover the short fall provided by a negatively geared property will benefit from high capital growth in the long run, but will have to wait until the mortgage is paid down enough in order to see positive cash flow. Long term, however, more equity allows for greater borrowing and thus, the opportunity to expand one’s investment portfolio.

Ultimately, the decision of which strategy to use and when, depends on your personal circumstances, goals and financial situation. Property experts such as AllianceCorp can help get you started, and develop a property accumulation plan so that you can enjoy the benefits of an investment property sooner. For more information, visit http://www.alliancecorp.com.au.


Jason Paetow

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