As a real estate investor, you most certainly have heard of negative gearing and positive gearing in real estate investing. Therefore, you must have had a hard time choosing the strategy that you should go with to end up with positive geared properties.
Today, let us talk about positive gearing in the real estate investing business. Moreover, let us go into more details about positive gearing. What is it and what makes it a must in real estate investing?
Related: Cash Flow Investment Property: The Key to a Successful Investment
First: What is positive gearing in the real estate investing business?
Positive gearing in real estate is buying an investment property that generates good rental income after deducting expenses. In other words, you take the money that you make out of your investment property (rental income) minus the expenses (excluding the income tax). What you have left is your cash flow that you get to keep.
When we are talking about property expenses, we mean property management, maintenance, and repairs as well as other expected and unexpected expenses.
Second: An example of positive gearing in the real estate investing business
Let us suppose that you rent out your investment property for $2,000 a month. You pay $800 worth of loan payments and $200 for other expenses. In this case, you have $1,000 in cash flow that you get to keep. That is exactly what positive gearing is in the real estate investing business.
Third: Why is positive gearing a must?: The pros of positive gearing
Positive geared properties are called cash flow properties for obvious reasons. They generate positive cash flow which simply means that you make money. The good thing about it is that you do not have to worry about your investment’s expenses each month. This also gives you the opportunity to expand your business and purchase more investment properties faster. Positive gearing allows you to build up your real estate investment portfolio faster than other investment strategies.
Related: How Do You Make Sure to Always Have Positive Cash Flow Real Estate?
Nowadays it is harder to get a loan due to strict conditions and requirements. It is especially hard to get it for real estate investment purposes unless you have some money on you. However, having a positive geared property already makes it easier for you to qualify for financing. Banks and money lenders treat positive geared properties as a better guarantee of repayment. Therefore, this serves you perfectly, again, when you are trying to expand your real estate investment business.
More rental income over time
The rents are constantly getting higher and higher over time. Therefore, you, as an owner of a positive geared property, are the one to greatly benefit. The higher the rent, the more rental income you receive. Keep in mind that your loan payments and property expenses remain the same at that point.
Many people assume that positive gearing does not generate capital growth due to the location. It is true that positive geared properties are usually located in urban areas; however, it isn’t always the case. They could be located in the cities or in the suburbs of these cities. Therefore, wherever they are located, they do generate capital growth though it does not have to be as big of a capital growth as a negative geared property generates. This means you get to make money each month, while your property is generating capital growth that will serve you when you decide to sell it.
Now, this is important for those who own both positive and negative geared properties. While you are operating a positive geared property, you can use that income to cover for negative geared properties you own. This is exactly what we mean by balance.
Suitable for everyone
Positive gearing is a strategy that is suitable for everybody, whether you are young and just beginning in real estate investing, or you are a retiree or an experienced real estate investor. It does not matter what your status is and how much money you have or make; positive gearing is the best option for you.
Fourth: What is the major downside of positive gearing?
The major downside of positive gearing is that such properties are harder to find. While negative geared properties are everywhere, the demand for positive geared properties is insanely high, which makes it harder to put your hands on one. However, you as a real estate investor should be able to spot a positive geared property when you see it. Another thing to consider when you invest in positive geared properties is the location. You might have to purchase a property far from your local area and to take care of it. If you fail to manage the property, this could be a downside. However, if you manage to take care of it, then the location is never a problem for you.
Fifth: Set your investment goals
As you might already know, before getting into action in the real estate investing business, you must have a plan. This plan should have your investment goals set clearly. Before getting into positive gearing, think what you want to achieve through your real estate investment. Do you want to instantly generate money? Or do you want to benefit when you sell the property? What is your end goal? How much rental income are you aiming for?
These are all questions and aspects to take into consideration. You have to know what you are getting into and why. If it makes sense to you and is reasonable, then go ahead and take action. If not, then consider another investment strategy.
Related: The 8 Best Ways to Make Money in Real Estate Investing
Every step of your real estate investing journey counts. Therefore, you have to think carefully and educate yourself as much as possible in order for you to make the right investment decisions. If you think that positive gearing is what you want to do, then use Mashvisor as a guide. Learn more about positive cash flow properties. You can find all the information on such properties that will help you get started in your investing business. You can find locations as well as properties that serve your investment goals. Mashvisor also provides you with the chance to consult one of our professionals for guiding and advice.