Equity is what makes properties positively geared

By Nila Sweeney | 18 Mar 2011

A positively-geared portfolio keeps lenders happy and eventually is what you need to retire on. But positively-geared properties are hard to find. A 10% yield is about enough for a typical investor. You’ll probably need to buy in a mining town to get that. There are a few other options though:

  • Buy and then renovate or develop to improve the yield
  • Pay down the mortgage
  • Wait for rents to increase

I didn’t mention buying properties with a high depreciation benefit like brand new apartments. That’s because you can’t retire on a portfolio that is only cash-flow positive after tax. On the contrary, the more of these you buy, the more income you must earn to claim the depreciation against. These are great to buy as early investments when you’re still in a high tax bracket. You can buy a cash-flow positive property right now, buying almost anything, buying almost anywhere… if you pay for it in cash. In fact, many properties could be positively geared if the loan-to-value ratio was only 50%. The majority of investors with positively-geared portfolios have low loan-to-value ratios. It is equity that makes most properties positively geared. And equity comes fastest from adding value and, secondly, from capital growth. Capital growth is crucial for cash flow. The same drivers in the market that push property prices up push rents up, too.

If you can find an area with excellent potential for capital growth and supplement that with renovation, or even better, development, within a couple of years of good growth, combined with adding value, you could go from an 80% LVR down to 50% paying very little off the mortgage in that time. Then you’ll have enough equity for the next project as well as good cash flow to service it.

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