A rental property is positively geared when it is purchased with the assistance of borrowed funds and the net rental income, if after deducting other expenses, is higher than the interest on the borrowings and the costs associated with the rental property.

That is a profit is made each year

The overall taxation result of a positively geared property is that tax will be paid on the income earned. However, other deductions can minimize this taxation. Even after a tax profit is made.

Capital investment is not the most important issue with positive gearing. The properties are usually in areas where growth is limited. Any large capital growth is a bonus and should not be expected.

The aim is to produce positive cash flow.

Neutrally Geared Property

You will often come across property investments that neither make nor lose money. They sit at the break even point. These properties, with proper management might turn into positively geared properties in time.

Rental Costs Summary

A landlord will need to allow for all of the following costs for the efficient running of a rental property:

• Council Rates
• Water Rates
• Emergency Services Levy
• Rental Management Fees (between 5% and 10%)
• Maintenance and Replacement (allow 4% per annum)
• Vacancy Rate (allow 3-4 weeks per annum)
• Insurance– Building, Contents, Landlord Insurance.

All these costs are taken into consideration when assuming a 25% cost rate to find the Net Rental Income. If a property is self managed a 20% cost rate could be used.