What is positive gearing?
A positively geared property — usually referred to as a “cash flow property” — is when the rental income you receive from your asset is more than the amount needed to cover for all its other expenses. These are payments you make for loans, taxes, insurance, maintenance, and so on. To put it simply, you get some profit after you’ve paid off all of the costs associated with your property.
To give you an example computation, let’s say you acquire a property worth $250,000 and you rent it out for $2500 a month. You make monthly payments on the bank loan worth $1400 and the other expenses needed to run your property such as management fees and everything else associated with it comes up to $600. After you deduct all the payments to be made, you’re still left with $500. This is what a positively geared property is.
What is negative gearing?
Negative gearing, on the other hand, is when one acquires a property and the income generated from it is less than the cost of handling and maintaining it. Let’s illustrate it further through this example: An investment property is worth $250,000 and it is rented out for $1000 a month. The monthly expenses on the property totals to $1100, including loan payments, cleaning services, maintenance, and more. In this specific scenario, we have a negatively geared property because the rental cost is more than the rental income.
How negative gearing works for holiday properties
Holiday home income is considered rental income but it varies from month to month. This is why it’s very important to track all expenses associated with your holiday property including utility bills, maintenance, service fees, and more. Keeping a good record of them to do a fair income vs loss calculation at the end of fiscal year will give you a clearer picture on where your property stands.