Am I Negative, Neutral or Postively Geared!?

Just having trouble knowing which way I'm geared in this senario.

All my expenses (excluding depreciation) = $400 pw
Rental Income $400 pw
Depreciation $100 pw

Am I...
1) Neutral because Rent = Expenses (the expenses I have to pay)
OR
2) Negative because my Expenses (and Depreciation) are greater than my income.
OR
3) Positive because I actually get $40 pw back from the Tax man.
:confused:

I realise that if I didn't have a job and wasn't paying tax I wouldn't get that $40 'rebate' so I figure I'd be neutral...

If someone asks me my strategy for this property I'd say positive geared. Did I reach my goal... I don't know! :eek:

Cheers...
 
good question Doug.

To me, 'gearing' refers to your pre tax scenario.
Depreciation is an after tax benefit.

You negatively 'gear' to generate a tax advantage.

So I say you are neutrally geared.
Maybe it is more practical to consider after tax +/-CF.
 
Rather an open ended question as is open to interpretation.

Based on my interpretation at $400 income $400 expense you are neutral as I don't take depreciation into account. Others will take the depreciation into account and swear black and blue that this is +cf.

With 2 of my properties I look simply at the value of the property I purchased at - in total (this will increase with any improvements to the property). The interest I am paying and the current rent I am collecting.

So bought property for $80k renting for $240 pw or $12,480 pa so getting 15.6%, very positive if I was paying the prevailing interest rate.

If bought property for $250k renting for $330 pw or $17,160 pa so getting 6.8%, just break even, as paying about the 6%. With the expense added and the depreciation taken into account will be either neutral or slightly positive.

Cheers
 
Doug, you want to keep in mind too, that depreciation isn't free cash flow.
It should realistically be set aside in a sinking fund for building maintenance.

And it is also subtracted from your cost base, so you pay cg tax on unspent depreciation.
 
And it is also subtracted from your cost base, so you pay cg tax on unspent depreciation.

but you get to claim depreciation at your marginal rate of tax now, and only have to pay cg on it at half your marginal rate when you well. Even if the marginal rate of tax was the same, it's claiming a deduction and getting 30% back now, and only having to pay back 15% in 20 years or whenever.
 
Doug, you want to keep in mind too, that depreciation isn't free cash flow.
It should realistically be set aside in a sinking fund for building maintenance.

And it is also subtracted from your cost base, so you pay cg tax on unspent depreciation.


Thanks all. I had always thought of 'Positvely Geared' and CF+ as being two different names for the same thing. Now I see how they mean different things. Now I can describe my situation if asked!

Winston, In my case I'm in a strata unit so most of the building maintenance will be allowed for in the sinking fund.

And I'm living in my unit first and then I will go and rent myself and I don't expect to buy a PPoR for years so this unit (to be my first IP) will be my PPoR CGT-wise for up to six years (But I had thought about CGT and I will re-asses when I purchase IP2).

HandyAndy,
I work out my yield on purchase price (I expect 7.3%) but I'm only paying interest on 80% of the purchase price so I don't tend to compare the interest rate with my yield to see if I'm neutral or not. (You said 6%ish so I figured you were refering to the interest rate.)
 
I work out my yield on purchase price (I expect 7.3%) but I'm only paying interest on 80% of the purchase price so I don't tend to compare the interest rate with my yield to see if I'm neutral or not. (You said 6%ish so I figured you were refering to the interest rate.)


I always work out yield on current valuation, rather than purchase price, and do my calculations as if I geared the full valuation and purchase costs. Doing it any other way will not give you comparable data, in effect you could have a positively geared inner city house if you only boorrowed 40% of the purchase price 5 years ago, it doesnt account for the opportunity cost of the equity tied up in such a purchase.
 
I always work out yield on current valuation, rather than purchase price, and do my calculations as if I geared the full valuation and purchase costs. Doing it any other way will not give you comparable data, in effect you could have a positively geared inner city house if you only boorrowed 40% of the purchase price 5 years ago, it doesnt account for the opportunity cost of the equity tied up in such a purchase.

Ok. I see what you did... and I very much appriciate hearing how you do that. I can see why working out yield on current val will help me compare where my money is best used. I haven't looked at net yield as a % yet but it's something I'll think about when finding IP2 which will probably be very near 100%+ LVR with the help of the equity in IP1.
 
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