Have you ever bought a property that seemed like a great investment at the time, but just ended up eating through your weekly budget? It sounds like your property might have been negatively geared.

Gearing refers to whether the costs of holding your property (interest rates, maintenance, fees, etc.) are covered by the income the property brings in (rent and tax return). If a property is positively geared, then the income generated is enough to cover the expenses. If a property is negatively geared, it means that the costs of holding the property are greater than the income received after tax.

 What is negative gearing - infographics

Some people justify getting a negatively geared property if they expect it to see good capital growth in the near future, with the prospect of rent increase. But the problem with negatively geared properties is that you can only own a very limited number of them because you need to be able to top them up with your own cash. If you plan on growing your portfolio to 5, 10, or even 50 properties, you can’t really afford to have any negatively geared properties!

So, how do you find a positively geared property? A good guideline for a positively geared property is to find somewhere that the yearly rent is about 6% of the purchase price. This should cover any interest at current rates plus additional expenses like maintenance.

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