When considering an investment property the aim is to generate a return in the form of income, a capital gain or a combination of the two.
You may find that some investment properties may initially have a low income but have strong growth potential to generate a high capital return. Alternatively some investment properties may generate a high-income form the get-go but offer less potential for capital growth.
It is important to consider the total return from your potential investment, that is the income and capital return combined, when making an investment decision.
Here is our overview on negative and positive gearing:
Negative gearing
A negatively geared property is when the total of all expense and operating costs (such as mortgage expenses, council rates and management fees) is greater than the rental received. So, a monthly contribution will be required to balance the difference in the expense and income.
A benefit of a negative geared property is that this negative return is able to be claimed as a tax deduction. The Australian Tax Office (ATO) will refund a proportion depending on your marginal tax rate off the negative return. So, in essence this means that the ATO is assisting you to pay for your investment.
However, it is important to consider that unless you are likely to earn a capital gain greater than the negative income over the long term, the investment property may not be a good investment.
Positive gearing
A positive geared property is when the rent received covers the mortgage interest and operating expenses with a profit left over.
The benefit of a positively geared property is that it generates an income stream immediately.
The downside is that positively geared properties can sometimes be difficult to find or that they may not have the potential to generate good capital returns.
However, with a bit of research it is possible to buy a positively geared property that also delivers good capital growth.
To identify these properties gems there are some key triggers to consider. These include: tenancy demand, population and employment growth, investment in infrastructure, location and proximity to transport, schools and employment.
In addition to buying well you should structure your loans approprately, maximise depreciation and tax benefits to make your investment property work harder for you to generate income.
In property investing there is no one-size fits all approach and each person will have their own unique circumstances to be considered.
Over time, well bought properties will generate compounding positive returns with rental income increasing with inflation and capital gains realised from increasing property values.
