The ultimate no-no in real estate investing is to have a property that is negative gearing. Negatively geared real estate investments are properties that generate more rental expenses than rental income, before and after taxation is considered. In other words, negatively geared properties do not make money for real estate investors. Instead, they cost money.
It’s obvious to real estate investors to avoid negative gearing, or negative cash flow, with real estate investments. But like many things in the real estate investing business, this is easier said than done. Follow these guidelines to avoid negative gearing in real estate investing.
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Find a Suitable Location
Repeat after me: Location, location, location! Location is virtually everything in real estate investing. It influences every form of profit, from positive cash flow to appreciation. Therefore, the first step to avoid negative cash flow properties is to find suitable locations. The type of location a real estate investor may seek will depend on the investor’s rental strategy. For instance, if a real estate investor will rent through Airbnb, he/she should search for cash flow properties near tourist destinations. A multi-family property real estate investor, on the other hand, should search for real estate investments near school districts and suburbs.
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Use Analytics When Searching
Finding areas with positively geared real estate investments is best done with the help of analytics. Predictive analytics, in particular, most accurately project positive cash flow areas and positively geared properties. Where can you make use of predictive analytics? Look no further! Mashvisor’s property search engine and investment property calculator are fully backed by predictive data. Our search engine pinpoints areas with high cash flow properties. From there, you can use Mashvisor’s investment property analysis to learn more about the positively geared property.
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Avoid Properties That Are Too Expensive
A possible cause of negative gearing in investment properties is having a property that is too expensive. Expensive real estate investments are all nice and fun for show, but if they do not generate sufficient rental income, they can become negative gearing properties. Thus, a real estate investor should not purchase a property that is beyond his/her financial capability. Remember, the goal is to have a positively geared property. How expensive a property is does not really matter. As a matter of fact, many positive cash flow properties are originally below-value properties that have had nifty renovations.
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Properly Finance the Property
Improper rental property financing can also lead to negative gearing. If loan payments, a vital expense, exceed rental income, a property has negative cash flow. Real estate investors should accept financing methods that facilitate the property, not burden it. It’s best to avoid heavy-risk financing methods like hard-money loans, especially if the investor is a beginner. Real estate investors should also be keen on building up their financial credentials to secure more lenient loan terms. Credit scores, background checks, and cash reserves are important considerations when trying to obtain rental property financing.
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Choose the Optimal Renting Strategy
Sometimes the key to avoiding negative gearing and following positive gearing is picking the best rental strategy for your property.
Which strategy to choose for real estate investments will depend on multiple factors. The most important factor is the investor’s goals. For instance, how much does the real estate investor want to earn in rental income? Does the real estate investor want to invest in long-term or short-term strategies? How active or passive does the investor want to be with the real estate investments? Being able to discover what you want to invest in will help guide you to a suitable strategy for your properties.
However, if you’re a numbers person, you’re in luck! Instead of figuring out what strategy to follow, traditional and Airbnb data can make that decision for you. Mashvisor’s investment property analysis lets real estate investors know the optimal renting strategy for the positively geared property they have searched for.
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Ensure Enough Rental Income
Negative gearing, as mentioned earlier, occurs when rental expenses are more than rental income:
Negative Gearing = Rental Expenses > Rental Income
Based off these two variables, there are two more basic ways to avoid negative cash flow. One of them is to have more rental income than expenses. In other words, a positive cash flow property needs to be rented out for its suitable (and lucrative) value.
Fair market value greatly determines how much rent to charge for a property. If a property’s FMV is inexpensive, about 1 to 1.1 percent of the value is the amount of rent to charge. If the property is on the more expensive side of things, 0.8 percent of the FMV is the right amount to charge.
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Manage Expenses Properly
The second way to avoid negative gearing based off the aforementioned inequality is to have less expenses than rental income. Real estate investors who want to make money with real estate investments need to control their expenses. This is not to say that investors should throw expenses out of the picture altogether. The point is to manage expenses within reason and still be able to attend to the property’s needs.
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Take Your Time
Investing in real estate investments, especially for a first-timer, can be stressful at times. It’s best for real estate investors to not let this stress get to them, as it can lead it ill-thought decisions, which can lead to negative gearing. Do not be hasty in real estate investing! Take your time during the process. Accept and follow only what you think will benefit your investment and keep risk at a minimum, or at a reasonable level.
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Let Mashvisor Be Your Primary Investing Tool!
If we were to sum up this blog in a sentence we would say: Use Mashvisor, secure property financing, and keep a cooler head in order to avoid negative cash flow properties. Mashvisor does everything we have mentioned in this blog. It finds suitable areas and properties using up-to-date predictive analytics. It also finds real estate investments based on an investor’s budget. Mashvisor’s investment property calculator keeps track of expenses and rental income. And finally, Mashvisor’s investment property analysis tells real estate investors which rental strategy is best for their positively geared property. What more can you ask of from a real estate investing tool?! To find positive cash flow properties and avoid negative gearing, use Mashvisor!