Positive gearing happens when the rent you earn from an investment property is higher than the costs of owning it, such as mortgage repayments, maintenance, and other expenses. The result is immediate profit and stronger cash flow, making it an attractive investment strategy for many property investors.
For Australian investors, positive gearing can improve borrowing power, provide steady income, and add stability to a portfolio. However, it also carries risks, including higher income tax due on the surplus rental income and the challenge of finding properties that deliver consistent returns despite the tax benefits it offers.
What is Positive Gearing?
Positive gearing is when the rent you earn from a property exceeds the total expenses of owning it, such as mortgage repayments, rates, insurance, and maintenance. This means your investment property exceeds its costs, generating positive cash flow.
Example: If your property collects $600 in rent each week and your costs, including mortgage payments and other property expenses, total $500, you make $100 profit. Over a year, that’s $5,200 in additional income, providing a steady income stream and clear financial benefits to your property portfolio.
Choosing a positively geared investment can be a key part of your overall investment strategy, especially when carefully considering current conditions in the property market. Additionally, many of the expenses involved are tax-deductible, which can help reduce your taxable income.
How Does Positive Gearing Work in Australia?
Positive gearing follows a cycle where your rental income from a rental property consistently exceeds holding costs or ongoing costs. The process involves:
- Purchase a positively geared investment property in a high-yield area.
- Collect rent from tenants.
- Cover expenses such as loan repayments, maintenance, and rates.
- Generate a surplus if rent is greater than expenses, making it a positive geared property.
- Manage tax implications, since the surplus is taxable but deductions can reduce liability, while also considering potential capital gain over time.
Benefits of Positive Gearing an Investment Property
- Steady cash flow – surplus income can fund personal costs, reinvestment, or portfolio growth.
- Reduced financial stress – property pays for itself and adds profit.
- Improved borrowing capacity – lenders value surplus income.
- Portfolio stability – positive cash flow offsets negatively geared assets.
- Tax deductions – allowable claims on interest, depreciation, insurance, and fees.
Disadvantages of Positive Gearing
- Higher taxable income – surplus increases assessable income, which may push you into a higher marginal tax rate.
- Slower capital growth – high-yield areas may lag behind major cities in property value appreciation.
- Vacancy risks – rental demand can change, affecting your ability to keep making money from the property.
- Interest rate increases – higher repayments can erode surplus and impact your positive cash flow.
- Finding suitable properties – true positive cash flow properties are competitive, so choosing the right investment strategy is crucial to success.
- Tax return considerations – while the surplus rental income is taxable, you can claim deductions to reduce your overall tax liability.
Who is Positive Gearing Suitable For?
- Income-focused investors – seeking immediate returns.
- Risk-averse or first-time investors – want properties where rental income covers expenses and pay for themselves.
- Growth-focused investors – looking to expand borrowing power by investing in high yield properties.
- Investors with long-term outlooks – prefer stable rental income and manageable loan interest costs.
Practical Tips for Finding Positively Geared Properties
• Research high-yield areas such as regional towns or strong rental suburbs.
• Focus on tenant-friendly properties with good amenities.
• Assess all costs including strata fees, insurance, and maintenance.
• Consider dual-income opportunities like granny flats.
• Work with local experts and run conservative cash flow estimates.
Final Thoughts on Positive Gearing
Positive gearing can provide steady income, stronger cash flow, and improved borrowing power for Australian investors. However, it also comes with risks such as higher taxable income and slower capital growth in some markets.
For investors seeking stability and immediate returns, it can be an effective strategy when paired with research, understanding common property investment strategies, and professional advice from a financial advisor. Additionally, managing ongoing costs like property management fees and securing favourable investor loans are important factors to consider for success with positive gearing.
Get in touch with our experts today for tailored advice and start maximising your returns.
FAQs
Q1: What is positive gearing in property investment?
Positive gearing occurs when rental income is greater than expenses, generating a surplus. This contrasts with negative gearing, where expenses exceed rental income, often relying on tax benefits and potential long term capital growth to offset losses.
Q2: Do I pay tax on positively geared property income?
Yes. The surplus is taxable, but deductions such as interest on investment loans, depreciation, and property management fees can reduce liability. Maintenance costs and other allowable expenses can also be claimed as deductions to lower taxable income.
Q3: What are the risks of positive gearing?
Risks include higher taxable income, slower growth, vacancies, interest rate rises, and the challenge of finding a cheaper property that can achieve positive cash flow while still offering good capital growth potential.
