If an investor wants to make money in real estate investing, he/she NEEDS a positively geared property. Positive gearing, or positive cash flow, is the essence of profit for real estate investments. What more should real estate investors know about positive gearing, and how can they find a positively geared property for sale?
What Is a Positively Geared Property?
A positively geared property is a rental property that generates more in rental income than in rental expenses. In other words, real estate investors with positively geared properties have money left after paying costs associated with owning and managing their rental properties. Positive gearing deals with properties before and after tax is considered.
Is It the Same as Positive Cash Flow?
The answer to this question is both yes and no. Positive gearing and positive cash flow tend to be used similarly in US real estate, although positive cash flow is the much more common term. If we are to go by technicalities, however, there is a considerable difference between the two.
As previously mentioned, a positively geared property is one that profits real estate investors by producing more in rental income than in expenses. A positive cash flow property does the same. So, what’s the difference? A subtle, but nonetheless important, factor. Positive gearing deals with properties before and after taxes are accounted for. Positive cash flow is generally applied after taxation.
Both positive cash flow and positively geared mean much of the same in American real estate. Therefore, we will use the terms synonymously in this blog.
Calculating positive cash flow, or how positively geared a property is, is pretty simple. By definition, a positively geared property is one in which the difference between rental income and rental expenses is positive, meaning that there is more rental income than expenses coming from a rental property.
Positive Cash Flow = Total Rental Income – Total Expenses = + $$$
Positive Cash Flow = Total Rental Income > Total Expenses
How much cash flow is needed to make money in real estate investing? The more positive cash flow a property has, the better (obviously). However, by merely comparing positive cash flow values, it is not easy to determine how much cash flow is ‘good’. That’s because many factors come into play with the investment. Luckily, by a simple conversion, there is a way to determine how much positive cash flow is good for real estate investments.
Cash-Zone Percentage = (Gross Annual Rental Income/Purchase Price) × 100%
Using the cash-zone percentage converts cash flow to a percentage, with the investment taken into account. Generally, real estate investments with a cash-zone percentage of 8 to 10 percent have good positive cash flow. The higher the percentage, the better the cash flow.
Importance of Positive Gearing
There are two main reasons why a positively geared property is important for real estate investors. For starters, having a positive cash flow property means that the investment is lucrative and paying itself off. Investors truly make money in real estate investing with positive cash flow properties. To elaborate, it’s worth noting that a property can have lucrative rental income but not necessarily positive cash flow. For instance, if the rental income of a property is $2,500, but the cost of expenses is $4,000, the property actually has negative cash flow, and serves as a net loss for the investor.
Positive gearing also helps real estate investors when buying an investment property. Since properties with higher positive cash flows are better real estate investments, investors can compare properties by their cash flow to narrow down choices.
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How to Find a Positively Geared Property?
Consider Your Finances
A huge determining factor in the positive cash flow of a property is its financing expenses. Mortgage payments, in particular, tend to cover much of a property’s income. Therefore, properties with high positive cash flow are usually well financed, with little burden on the investor.
When wanting to find a positive cash flow property, we need to apply the same principle. The property needs to be financed properly, preferably with low mortgage payments. Real estate investors thus need to build up their credit scores and finances in order to secure mortgages with smooth terms. Good credit scores, cash reverses, and other financial requirements will be needed to have lower mortgage payments, which will allow investors to find a positively geared property much more easily.
Find a Rental Market
Once your finances are in check, you can begin to search for areas that will have a positively geared property. The easiest and most effective way real estate investors can do this is to perform a real estate market analysis. That might sound complex, but if you’re using Mashvisor, it really isn’t. All an investor would need to do is use the heatmap to search for areas with high positive cash flow. Then, the investor can find properties based on his/her financial budget, desired type of property, expected returns, and much more!
Perform an Investment Property Analysis
Once the real estate investor has found a positively geared property for sale that he/she is interested in, an investment property analysis is required. The investment property analysis, once again provided by Mashvisor, will break down the property in terms of positive cash flow. The estimated rental income and expected expenses, both central to cash flow, are provided for study. The analysis will also focus on other metrics of ROI, like cap rate and cash on cash return. It will also inform the real estate investor about the optimal rental strategy and an overall grade of a property’s investment capability.
To Sum Up, Just Use Mashvisor!
All that was said on how to find a positively geared property for sale can be summed up in five words: Start your trial with Mashvisor! Mashvisor’s investment property analysis will help investors find a positive cash flow property with little effort and in little time! Be sure to start your trial with Mashvisor today to find and analyze the best real estate investments you can find!