Positive Gearing - Traps To Avoid

There is currently a great deal of interest in finding positive geared properties, and as with many investment trends there is plenty of exaggerated hype about the pot of gold at the end of the rainbow. The illusion of easy money can turn into a disaster if you aren’t careful, so here are some traps to avoid:

• Inflated Rental Estimates – Proper research can establish the appropriate market rent.

• Rental Guarantees – you could be paying an inflated purchase price to cover a rental subsidy from a developer, and at the end of the subsidised period you may find there is no rental demand for your property.

• Exaggerated Depreciation Estimates – ensure that the Depreciation Schedules have been prepared by an independent quantity surveyor.

• Interest Deferral Loans – Instead of paying the interest you just add it to your debt. While there might be a place in your strategy for some capitalisation of interest, be careful that one day you don’t wake up to find that your debt is a lot greater than the property is worth. On the other hand, there are some financial products that can optimise your cash flow without resorting to dubious or expensive loans.

• High Risk Properties – Some positive cash flow properties may end up delivering a capital loss when the time comes to sell, and while there are no guarantees in real estate you should carefully weigh all the risks associated with the property being purchased. (Cash flow should not be the only factor.)

• Special Commercial Arrangements – high yield properties can be found in various commercial scenarios, such as student accommodation, retirement complexes, serviced apartments, resorts and holiday lettings. These are not always a bad thing but beware of any hidden costs, particularly for intensive property management.