Positive Gearing and potential down-side to looking for positively geared property
(See also negative gearing) Positive gearing occurs when the income from your investment property exceeds your interest expense and all other deductions such as council rates and management fees. Nearly 100% of investment property purchased will eventually become positively geared, even although your investment property may have started off as negatively geared.
It is extremely important to understand that the rules of investment in terms of risk versus return will almost always result in a positively geared property giving a very high rental yield at the expense of future capital growth and of course increased risk.
Beast examples of this are all round Australia during the recent ‘mining boom’. Investment properties in coal towns, iron ore towns and other mining areas were giving fabulous yields. It was not uncommon to be offered an investment of around $400,000 with annual yields in excess of $50,000! Now that the boom is over, these same properties are lying empty, still with the landlords paying maintenance and rates and are almost impossible to sell as demand has disappeared.
In a case of positive gearing, the landlord will generally be subject to additional tax on income derived from the investment property.
