Are you positive it's negative?

From: GoAnna !


I am interested in hearing people's definition of a "positively geared" property.


GoAnna !
Why not go out on a limb, that's where all the fruit is. (Mark Twain)
 
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Reply: 1
From: Bydntsel .




My interpretation of positive cash flow.

The rent covers all outgoings.
No moneys need to be put in.
No reliance on tax deductions.

bydntsel

"Follow your own advice"
 
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Reply: 2
From: Ray .


Hi All,
A positively geared property is one that
returns a Net income after consideration is
given to all costs. e.g. purchase costs ,
interest repayments, management fees,
maintenance, rates etc., ---- against income
received in rent and benefits gained in overall
income from depreciation allowances on an
annual basis .

Cheers.
 
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Reply: 2.1
From: GoAnna !


When purchasing a property you would calculate whether it was positive or not on

100% lending of purchase price plus costs?

Purchase price only?

Whatever is borrowed (purchase costs less deposit paid)?

And do you have a rule of thumb to quickly estimate whether it is likely to be positive?

GoAnna !
Why not go out on a limb, that's where all the fruit is. (Mark Twain)
 
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Reply: 2.1.1
From: Anthony C


Hiya all,

For positive as opposed to growth.... Well, my really rough rule of thumb is that I add another 5% on to the current IO fixed 5 year interest rate, as my base yield return. E.G. If "which" bank is at 6.99% then i gotta find something yielding around 12% for it to cover itself fully before any tax deductions are included.

Once the figures are available then a more accurate return can be calculated.

Anyone else do this, Les does this add up with you?

Cheers AntC
"Let us so live that when we come to die even the undertaker will be sorry."
--Mark Twain


 
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Reply: 2.1.1.1
From: Donna Larcos


Anything where I am left holding money
after all income and all outgoings
including depreciation etc. is positive to
me. Sure if you lose your job you'll be
cashflow negative cos the tax savings
won't be worth anything or if your throw in
a 20% deposit it will be positive but you've
got the 20% tied up. I just want money in
my pocket at the time of the deal with as
little of my own money (preferably none)
as possible involved.
 
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Reply: 2.1.1.1.1
From: Paul Zagoridis


Gearing means leveraged (i.e. using borrowed money). So I calculate earnings based on borrowed funds including the deposit, legals and costs.

I use credit card rates for all funds beyond 90%-95% LVR on the registered first mortgage. That way if the funds come from another security or retained earnings the opportunity cost of the investment is included.

Tax consequences are only included for negative cashflow impacts. So refunds, rebates and grants are excluded.

If the property shows a profit after that, I consider it positively geared (but I normally use the phrase positive cashflow).

Fundamental analysts of public companies like to use EBIT (Earnings Before Interest and Tax). That equalises companies to an extent. I use EBIT and IRR when analysing properties.

Paul Zag
Dreamspinner
Oz Film Biz is at
http://www.healey.com.au/~paulz
 
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"Are you negative, it's positive stupid!"

Reply: 2.1.1.1.1.1
From: Michael Croft


I'm with Paul and Donna on this one and it's a good question too as there seems to be a fair bit of confusion about; positive geared, cash positive, rates of return, internal rates of return and what it all means.

Case in point; an agent, of over 20 years standing told me of a great buy he'd just made. Showing close to a 12% gross return and he was proud of himself too, locked in for 5 years at 6.99%. So I ran the figures through PIA and he was losing $10 per week on average over the first 5 year period.

He was astounded and told me he owns 12 "cash positive" properties, all purchased in the last 18 months. Turns out only 3 of his properties put money in his pocket, the rest cost him about $30 each to control. He's going backwards at the rate of $270 per week! and that's at 100% occupancy, some investment!

This guy can afford it for now, because as an agent the markets good and his serviceability is not a problem. He now knows that the inevitable down turn will wipe him out unless he does some major restructuring.

So what's the point of this rambling? As they say it's all in the numbers and fools rush in. The unit with a gross return of nearly 12% is a losing proposition because of a special purpose levy which is ongoing. Something to do with concrete cancer and a lack of due diligence - but that's another story.

Michael Croft
 
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"Are you negative, it's positive stupid!"

Reply: 2.1.1.1.1.1.1
From: RM .


Michael,

I was told the quick rule of thumb (well sort of, I would like confirmation from the experts) to determine if a property was "positively geared" was to do the following -

Part 1:
Lets say IP rent is $200 per week. This equates to $200 x 50 weeks (Allow 2 weeks as letting fee / advertising /tenant sourcing fee) = $10,000 per annum.

Take the purchase cost (lets say)$150,000.

Therefore $10,000 / $150,000 = 6.67% (A good return I would think but not quite positive yet due to costs!)

Now Part 2:
So what are the costs? Well lets say that you have rates, (both council and water), land tax, insurance, maintenance, repairs, gardening, body corp etc etc and the total costs come to 20% of your annual rent.

This means you need to add $2,000 per annum to the cashflow cost of your IP. So what else is left now? The biggie - Interest!!!

Lets say you borrowed the whole lot! $150,000 borrowed at 6.5% = $9,750. Now you need to add in the costs from before. The $2,000. This gives you $11,750. Did I forget anything? Right, the agents slice, how could I forget.... You need to add 7% (REIV)of the rental = $10,000 * 7% = $700.

On the liabilities side we have $2,000 (costs) + $9,750 (interest) + $700 (agents fee). A total of $12,450 per annum. Simple.

Now all we do is divide $12,450 by 50 weeks which gives us $249 per week in rent. We now have a yield of $12,450 / $150,000 = 8.3%

A rental of $249 per week will cover all costs so it will be positively geared. Costs you nothing out of pocket....

Forget depreciation, borrowing costs etc. If you lose your job, the IP will still be able to support itself whilst you are having cafe lattes at Centrelink. If you don't lose your job, well then you have just made a bucket load of tax free money from the non-cash depreciation.

So, is this reasonable? If so, how many investors have IP's returning this in the 10 - 15km belt from the CBD's in this market. Any CBD's. Please let me know as I would only be too happy to take them off your hands.....heated market or not!

Thanks RM (Apologies for the length)
 
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"Are you negative, it's positive stupid!"

Reply: 2.1.1.1.1.1.1.1
From: H T


Dear RM

that is crazy

HT
 
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"Are you negative, it's positive stupid!"

Reply: 2.1.1.1.1.1.1.1.1
From: Rixter ®


Negatively Geared - is when all your incomings are LESS than all your outgoings AFTER all tax deductible items have been claimed for.....ie Someone in this situation has to PAY out of their own pocket to bring the deal up to a break even scenario from their AFTER tax dollars.

Positively Geared - is when your incomings are GREATER than all your outgoings but BEFORE claiming any tax deductible items that can be claimed for...ie Someone in this situation has to PAY further tax on the surplus cashflow.

Cashflow Positive - is when your incomings are GREATER than your outgoings AFTER all tax deductible items have been claimed for...ie Someone in this situation has ALREADY paid tax on the surplus cashflow.... In other words they have more cash in their hand AFTER paying tax than they would have had if they did not hold that property in the first instance.

A property can only be Cashflow positive if it is acquired with 100% of the purchase price plus buying costs from borrowed money.


Hope this helps

Happy Investing,
Rixter :)
 
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"Are you negative, it's positive stupid!"

Reply: 2.1.1.1.1.1.1.1.1.1
From: Sergey Golovin


Is negative when you had enough and want out badly and positive when you still trying to make sense out of it despite all odds?

Serge.
 
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"Are you negative, it's positive stupid!"

Reply: 2.1.1.1.1.1.1.1.1.1.1
From: Les .



G'day Rixter,

I've gotta disagree with this one ....

"Negatively Geared - is when all your incomings are LESS than all your outgoings AFTER all tax deductible items have been claimed for"

I have some negatively geared properties (BEFORE Tax, they cost me - but AFTER Tax deductions, they PAY me). So, I would say this:-

"Negatively Geared - is when all your incomings are LESS than all your outgoings BEFORE all tax deductible items have been claimed for"

And, I KNOW they're negatively geared, because if I stopped work, they would take money OUT OF my pocket (no Tax deductions, you see). But, as long as I hold a job, they pay me - thus making them "negative geared, with a positive cashflow" (+ve only because of Tax deductions...).

Now, let me qualify that by saying I don't KNOW that this is an official description of "negative geared" - but it makes sense to me ;^) Any takers??
Anyone got "Hoyle for property investment"?

Regards,

Les


- "Eschew Obfuscation" - ;^)
 
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Sim

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"Are you negative, it's positive stupid!"

Reply: 2.1.1.1.1.1.1.1.1.1.1.1
From: Sim' Hampel


I agree with you here Les.

I sometimes get the argument from the -ve gearers or "depreciation junkies" where they state "but you're only 28... you're going to be working for ages yet !".

BZZZZT. Wrong answer.

My goal is to get out of my PAYG job as soon as practicable. Once I stop working PAYG, most of the depreciation benefits disappear rather quickly.

 
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"Are you negative, it's positive stupid!"

Reply: 2.1.1.1.1.1.1.1.1.1.1.1.1
From: Rixter ®


G'day Les,

Re: ""I have some negatively geared properties (BEFORE Tax, they cost me -
but AFTER Tax deductions, they PAY me). So, I would say this:-

"Negatively Geared - is when all your incomings are LESS than all your
outgoings BEFORE all tax deductible items have been claimed for""

Yes Les,the scenario you describe is what I already said as being "CAshflow Positive". Your actually got dollars in your hand after tax..

Happy Investing,
Rixter :)
 
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"Are you negative, it's positive stupid!"

Reply: 2.1.1.1.1.1.1.1.1.1.1.1.1.1
From: RM .


Les/Rixter,

First let me apologise for the length of this post!!!

And apologies for being a pain but I just couldn't help myself. You see from my perspective, the first hurdle is finance. Lets assume you get over that one. The next hurdle is what are you going to buy?

Well that's also easy. A positively geared property says the newbie investor! The expert says, “And how do you propose to do that and would you know what it looked like”? Ahhh, not sure says the newbie investor???

And how do you achieve it?? Newbie investor again says "not sure".

Now, are you starting to get the feel of what some real estate agents, marketers and developers are pushing on the unsuspecting?

My view is, and I will stand being corrected and am more than happy for the experts to teach me a thing or two, is that there only two types of property investments. Those that add wealth and those that do not. Anyone can buy those that do not add wealth.

Now with wealth there are two types of wealth. Those properties that give you real hard cash that you can spend right now and those that give you wealth that you can borrow against or sell to realise. When was the last time you heard someone say, I'll get the bill because I just made 5% growth in the last 3 months....

So, if we ignore the capital growth part of the wealth exercise for the moment, there are positive and negative geared (cashflow) properties.

The true test of the wealth creation ability of a property is if it can support itself without you having to rely on the tax aspects. Remember, what happens if you keep a property long enough or you buy one old enough that you somehow manage to fully depreciate all tax benefits? What is left? Only the rental income. What if, as Les and others have said, you stop work. The holy grail for all property investors. What happens to your tax benefits then.?

If the rent covers all costs, even if only by $1, then it is positively geared. If you were working, you would add $1 to your taxable income but the property has supported itself. That is, no $ inputs from you to hold it. And at tax time, the tax man will want his share of your $1 profit. This is the real test of what type of property it is.

If the rent did not cover all the costs, by lets say $1, then you would have just suffered an operating loss. You would be, negatively geared. You would add that loss to your tax return and the tax man would contribute your marginal rate to that $1 loss. So you would be out of pocket by 70 cents for a 30% tax rate, 58 cents for a 42% tax rate or 51.5 cents if you are on the 48.5% tax rate.

Now to keep a semblance of sanity, hopefully most investors accept a small loss in the first year if capital growth is compensating for that loss. If the property is negatively geared and the growth is less than the prevailing inflation rate, then you would be making as much wealth as you would in emu farms or macadamia plantations.

So lets assume the property is negatively geared ($1) loss after all costs and you happen to be working and paying tax and you have $1999 in depreciation. Well, at tax time it is still a negatively geared property because you have just suffered a $2000 (non-cash) tax loss and so you reduce your income by $2000 and so you pay less tax. Yes it puts tax free $$$ into your hand, but only because you have used up part of your property asset. At some point in the future, that property asset will be worth a big fat zero!!!. Fully depreciated. No more tax benefits.... Meanwhile the land is what has gone up by zillions and has provided the equity. So it it is negatively geared but with positive cashflow.

The other side of the coin is negatively geared negative cashflow. Have enough of these and they will send you to the poor house.

Finally, some experts on this forum said, if you find the property and it is negatively geared and has negative cashflow, it better have the potential to get good capital growth quickly or you negotiate the price down until it becomes negatively geared with positive cashflow.

I now look forward to being corrected.

Thanks RM.
 
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Sim

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Do you appreciate the depreciation ?

Reply: 2.1.1.1.1.1.1.1.1.1.1.1.1.1.1
From: Sim' Hampel


Hi RM, I think you've pretty much (mostly) got it right - well said.

One thing I would like to add though (and Dunc can help me out on this one !), is further discussion on the concept of depreciation.

The "negative gearer and proud of it" crew will sometimes refer to depreciation as a tax benefit from the government, or rebate or something similar.

The fact of the matter is, depreciation is an expense. More specifically, it is what's referred to as a non-cash expense. That is (strictly speaking), an expense you have incurred without actually handing over any money (but you have !).

- - -

According to the ATO:
http://www.ato.gov.au/content.asp?doc=/content/Individuals/8185.htm&page=2#H2

"What is depreciation?
Under income tax law, you are allowed to claim deductions for expenses incurred in earning assessable income—for example, recurring expenses such as rent, wages and electricity. Some expenses, such as the cost of acquiring capital assets, are not allowable. Capital assets are those which provide a benefit over a number of years—for example, motor cars and machinery.

The value of such assets gradually reduces over time as they approach the end of their effective lives. Assets which lose value in this way are said to depreciate. In recognition of this fact, the cost of capital assets used in producing assessable income can be written off over a period of time as tax deductions."

- - -

So how does this work ?

Well, that hot water service you paid for when you bought the property (part of the purchase price of the property), has a finite life, and as such will need to be replaced at some stage in the future.

There will be an expense incurred (capital in nature, so not immediately tax deductible) when you replace the hot water service.

The government allows us to write off the cost of replacement of the unit over its useful life, hence the amount claimable for depreciation.

The intention is always that you will then incur the cost of replacing the item and then claim further non-cash deductions for depreciation of the item.

So you see... these are all just added expenses that work in almost exactly the same way as cash-expenses. Sure, depreciation can and should be used to improve the after-tax position of an investment. However, do not be fooled into thinking that depreciation is anything other than an expense !

 
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"Are you negative, it's positive stupid!"

Reply: 2.1.1.1.1.1.1.1.1.1.1.1.1.1.2
From: Rixter ®


RM,

You also have to realise that over time the rental income will also increase and and at some point it will push your property into a Positive Geared situation..

Happy Investing,
Rixter :)
 
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"Are you negative, it's positive stupid!"

Reply: 2.1.1.1.1.1.1.1.1.1.1.1.1.1.2.1
From: RM .


Rixter,

You said -

"You also have to realise that over time the rental income will also increase and and at some point it will push your property into a Positive Geared situation..

You would certainly hope so!! If it didn't and you were not gaining any capital growth, then you are still going backwards.

The other point is that if your rent goes up over time, does it increase above and in proportion to the prevailing inflation rate. If not, the rent could go up and you could still be going backwards.

Thanks RM.
 
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"Are you negative, it's positive stupid!"

Reply: 2.1.1.1.1.1.1.1.1.1.1.1.1.1.2.1.1
From: Rixter ®


Hey RM,

If you check out the historical capital growth rate stats it shows that property appreciates at an average of 3-5 % above cpi.

But you're completely correct if its not then you're going backwards.

Happy Investing,
Rixter :)
 
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