Negative vs positive gearing and how it applies to Airbnb
The terms negative and positive gearing are commonly used by property investors. Chances are that you’ve come across them if you’ve been actively interested in property investment. If you’re curious to learn more about these concepts and how they apply to the short-term rental market, we’ve covered them in this article.
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, property managament, 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 Airbnb properties
Airbnb 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 Airbnb 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.
How does Hometime help?
While the process of bookkeeping can be quite tedious, our software and services can help you save time. Our proprietary software keeps track of collected income and other associated cost information of your property. The software can also easily access this information through our Host Portal and in our monthly statements. Additionally, we provide end of year reports which you can pass on to your accountant saving them time and you the associated expenses.
The only way to create financial growth through property investment is by making great strategic property management decisions. Increasing your booking score, dynamic and correct pricing strategy, can also be key factors as to why a property could be positively or negatively geared. Your financial advisor is in the best position to advise you on investment decisions. However, once you make them, leave the operational heavy lifting to us.