How To Identify Positively Geared And Cash Flow Positive Properties

How To Identify Positively Geared And Cash Flow Positive Properties

I recently wrote an article on the pros and cons of investing in positively geared and negatively geared property.

In todays article we take this a step further and look at how to identify positively geared and cash flow positive properties.

A positively geared property is one where the rental income from the property covers all of the on-going costs associated with that property. 

There are actually two types of positively geared properties.

 1. Positively geared properties before tax

These are properties where the rental income covers the on-going costs associated with your property before you claim your tax deductions and benefits.

The calculations below are based on a $400,000 interest only home loan, fixed at 4.99% p.a. The property was constructed in 2014 for $236,519 and is owned by a full time employee earning $70,000 p.a.*

Example of a positively geared property before tax

Income
Rent $27,000 p.a. ($520 a week)
Expenses
Mortgage $19,960 p.a. ($383 a week)
Rates $2000 p.a.
Management $1820 p.a. (7% of $26,000)
Insurance $700 p.a.
Maintenance $500 p.a.
Strata NA
Other – Electricity, Water NA
Annual Income $27,000
Annual Expenses $24,980
Annual Pre-Tax Income $2,020

Take a look at an example of a positively geared property here:

2. Cash flow positive properties before and after tax*

These are properties where the rental income, along with your tax deductions and benefits, cover all of the costs associated with your property.

The calculations below are based on a $400,000 interest only home loan, fixed at 4.99% p.a. The property was constructed in 2014 for $236,519 and is owned by a full time employee earning $70,000 p.a.*

Example of a cash flow positive geared property before and after tax*

Income
  Rent $21,840 p.a. ($420 a week)
Expenses
  Mortgage $19,960 p.a. ($383 a week)
  Rates $2000 p.a.
  Management $1820 p.a. (7% of $26,000)
  Insurance $700 p.a.
  Maintenance $500 p.a.
  Strata NA
  Other – Electricity, Water NA
Annual Income $21,840
Annual Expenses $24,980
Annual Pre-Tax Income -$3,140
After Tax Income (Year 1) $7,384

The after tax income in the table above was calculated using Your Mortgages Negative Gearing Calculator.

You can see the results of Your Mortgages Negative Gearing Calculator below:

How to identify positively geared and cash flow positive properties - www.pumpedonproperty.com

Is there at quicker way to identify a positively geared property?

“The Quick Test”

“The Quick Test” was made famous by Steve McKnight in his book 0-130 Properties in 3.5 years.

“The Quick Test” or “The 11 Second Rule” will help you to easily calculate the gross rental yield of any property.

This rule is particularly effective if you are looking at a large number of properties and need to filter them quickly.

If a property has a gross rental yield of over 10.4% it passes “The Quick Test”.

Your gross rental yield is calculated by taking the purchase price (or value) of a property and dividing it by the annual rental income.

An example of a property that fails the quick test:

  • Purchase price $350,000
  • Annual rent $23,400 p.a. ($450 a week)
  • $23,400 divided by $350,000 x 100 = 6.68%

An example of a property that passes the quick test:

  • Purchase price $350,000
  • Annual rent $36,400 p.a. ($700 a week)
  • $36,400 divided by $350,000 x 100 = 10.4%

You can find an online version of “The Quick Test” Calculator here.

The information contained in this blog is for informational purposes only. No responsibility can be taken for any results or outcomes resulting from the use of this material. While every attempt has been made to provide information that is both accurate and effective, the author does not assume any responsibility for the accuracy or use/misuse of this information.

I am not a lawyer, accountant or financial planner. Any legal or financial advice that I give is my opinion based on my own experience. You should always seek the advice of a professional before acting on something that I have published or recommended.

* The numbers contained in this blog are not 100% accurate and are based on general calculations for conversational purposes only. Your accountant, tax and depreciation specialist will be able to give you specific calculations based on your current situation.

Ben Everingham

About

Ben founded Pumped On Property after building a multi-million dollar property portfolio over a 5 year period. His mission is to show you how to replace your income through property investing so you can do what you love…full time.