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By Natalie Seaman
7th March 2017

 

Investment properties can either be negatively geared or positively geared. Let us compare the two investment strategies.

Negative Gearing

Simply put, if the money you are paying out on your investment property (eg mortgage, repairs, insurance, property management fees etc) is greater than the money coming in (eg your rental income), then your investment property is negatively geared. The net loss can be used to reduce your taxable income, and therefore the amount of tax you pay. Ideally your investment property should also be increasing in value over time so that when you eventually sell, you will be counting your profits via capital gains.

Positive Gearing

If your rental income is greater than your outgoing payments then you are making a profit or net gain on your investment, and therefore your investment property is positively geared.

Both of these strategies are good and the one you choose will depend on your investment goals. For the purpose of this article, let’s look at the benefits of a positively geared investment property.

Let’s look at one of the apartments in our Salt Kingston development as an example.

Unit 27 is a two bedroom apartment with one bathroom and one allocated car park in the secure underground carpark. Located on the first floor, it has a total living area of 68m2 . At the time of writing this, the price of this apartment is $430,000 and the estimated rental return for this property is $540 to $590 per week.

If we look at these figures in the context of the table below, we can see that the Gross Rental Yield (Total annual rent divided by the purchase price and multiplied by 100) will be approximately 6.89%. Given that the average bank term deposit is currently paying 2.6%, an investment property at Salt is nearly triple the return of putting your money in the bank. Plus, you have the added bonus that the property should increase in value over the coming years.

Property Investment Analysis

2 BEDROOM – UNIT 27
Purchase Price $430,000
Estimated Rent (P/W) $570
Deposit (10%) $43,000
Gross Rental Yield 6.89%

 

Now let us get an idea of how much we can earn from purchasing an investment property. Again, we will use Unit 27 at Salt as an example. See below the after tax cost/income figures that represent how much you will be left with after tax, and after expenses (including mortgage payments) have been deducted. After a pretty good first year return of $194 per week, we are still earning an $85 per week profit by Year 5.

 

Cost/(Income) per week for a two bedroom unit

1 YEAR (194)
2 YEAR (90)
3 YEAR (86)
4 YEAR (84)
5 YEAR (85)

(The above table outlines net income (net cash flow into your pocket) per week after tax. These figures are calculated as pre tax cash flow amounts less any tax credits assuming tax refunds are issued in the same year in which they are based.)

 

In summary, the table below wraps it all up for us and shows how the rental income plus tax savings and less expenditure for this property result in an annual profit in the first year of ownership of $10,094.

 

Investment Cost Analysise (2 bedroom with a 10% deposit – Year 1)

INCOME/EXPENSE PAYMENT MODE 37% MARGINAL TAX
TOTAL EXPENSES Aggregate Costs of running Investment $27,350
TOTAL REVENUE:
TENANT Rent $29,070
ATO Tax saving $8,374
YOU Profit $10,094

 

Not a bad return by any means, especially when you consider that in addition to this profit, your property is also increasing in value during your ownership. Also consider this – not only the value of your property will increase but also rents usually increase over time as well, adding to your profit.

Interested in purchasing an investment property? We would love to help you. See our POD website for information on all of our current developments.

Have a question? Leave a comment below and we will get back to you.

 

DISCLAIMER: This document contains general information only. It does not take into account your circumstances. It’s important to consider your particular circumstances before deciding what’s right for you. Although this document contains information from sources considered reliable and is provided in good faith, we do not guarantee that it is accurate or complete. You should not rely upon it and should seek qualified advice before making any investment decision. POD Projects Group, its servants, employees and consultants do not accept any liability for any resulting loss or damage to the reader or any other person. It is not intended as financial advice or as an offer or recommendation of products. You should obtain independent financial advice that addresses your particular investment objectives, needs and financial situation before making investment decisions. ©Copyright 2017