But most people who go down the path of trying to build a positive cashflow property portfolio don’t get what they expected. There are some common myths people make in this space, so I wanted to bust them so you can avoid making the most common mistakes for yourself.
This term can cause some confusion, so before we get tactical it’s worth covering off.
The ‘gearing’ part refers to borrowing to invest. Any time you borrow money to invest it, you are gearing. The most common form of gearing in Australia is when people borrow to buy investment properties, but you can also gear into shares, crypto, artwork, or anything in between.
The ‘positive’ part refers to the cashflow of your investment.
Any time you borrow money to invest, at a minimum you’ll have to pay ongoing interest costs. And, for investments like property, you may have additional ongoing costs like rates, strata, and insurances.
On the flip side of the coin, investments generally will produce income through the form of rent, dividends on shares, or interest.
If the cashflow from an investment (income less expenses) is positive, your investment is positively geared. If the cashflow is negative, your investment is said to be negatively geared.
How do you get a positively geared property?
For a property to be positively geared, the rental income needs to exceed the cost of borrowing money as well as other ongoing property costs.
If we look across Australia, on average the rental income percentage return (rental yield) is sitting at 3.68 per cent. At the same time, the average mortgage interest rate is 7.48 per cent.
This suggests that on average, if you buy a property the cost of your mortgage is going to be higher than your rental income, meaning that your property won’t be positively geared and instead you’ll need to fund the negative cashflow on your investment.
If you want to find a positively geared property, you need to find a property where the rental income is higher.
These properties are typically found in rural and regional areas, where there are fewer investment properties and less property available to rent, which in turn pushes rents up.
Why would anyone not positively gear
After reading the explanation above you’d be forgiven for scratching your head wondering why on earth anyone would consider doing anything other than positive gearing when they invest.
But unfortunately, it’s not quite that simple.
As mentioned above, to get a positively geared property you typically need to look beyond the average property and specifically target areas that deliver higher income returns.
But it’s worth noting that when you buy property, the income return you receive is only part of the picture. The total return on a property investment is also made up of the growth in the value of the property over time.
In Australia, the average property growth rate is 6.3 per cent, which means Australian property doubles in value every 11 years on average.
To state the obvious, if you buy a property that doesn’t grow, or even one that grows at a below-average rate, you’ll be missing out on a significant amount of potential profit on your investment.
Do positively geared properties grow at the same rate?
If you look at the average property across the country, or properties in the majority of metro areas in Australia’s major property markets of Sydney, Melbourne, and Brisbane, you can see the long-term growth of property has been strong.
These markets over the last ten years have increased on average by 6.73 per cent, slightly above the Australian average.
But not all markets in Australia have achieved this level of growth, with many other areas, specifically regional and rural areas experiencing much lower growth rates.
For example, looking at the Perth and Adelaide markets, the average growth rate over the last 10 years has been only 4.7 per cent.
Comparing the two different returns over time, if you were to buy an investment property for $500,000 today that grew at 4.7 per cent each year, in 20 years' time your property would be worth $1,277,643.
In contrast, if your property grew at the 6.73 per cent rate of the premium property markets, it would grow to be worth $1,913,803 in 20 years.
Buying premium effectively delivers you $636,160 more profit from the same investment - or to say it another way, if you target positively geared property you could be costing yourself $636,000 in lost property growth.
Where property investors go wrong
I speak to a lot of people that have been sucked into the allure of building a positively geared property portfolio. These people are typically keen to get ahead with their money, they’re on incomes that allow them to save and invest at a solid rate.
For many of these people, they don’t actually need the positive income they’re looking to build today, but instead they’re trying to set themselves up with another income stream for the future they can use to replace their employment salary with investment income.
What most of these people don’t realise though is that when they buy up properties with the aim of building income, they’re compromising on the potential for future growth in the value of their property investments.
Ultimately, you only have so much borrowing capacity, i.e. the banks will only lend you so much money, and you can only buy so many properties.
If you ‘use up’ all your borrowing capacity to buy investments that don’t grow well (or at all), you’re effectively giving up one of the most powerful levers you can use to get ahead with your money.
The wrap
Investing through property is an important and powerful way to grow your wealth - but at the same time, property is expensive to buy and sell so it’s something you want to get right from the start.
When you nail it with property, you’ll accelerate your wealth building and set up your future money success.
But when you get it wrong, it will slow you down and hold you back. There are a heap of myths out there around property, and some of the commonly accepted approaches and ‘wisdom’ simply don't work.
Take the time to understand the key considerations, so that when you invest with property you can make sure it actually works for you.
Ben Nash is a finance expert commentator, podcaster, financial adviser and founder of Pivot Wealth. Ben’s new book, Virgin Millionaire; the step-by-step guide to your first million and beyond is out now on Amazon Audiobook.
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Disclaimer: The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstances before acting on it, and where appropriate, seek professional advice from a finance professional.
