At what point does an IP become neutrally geared?

[jaspn]

I'm looking at IP#1 which yields 7.8% gross. After expenses (which being in Qld are quite hefty) and vacancy etc I'm looking at a net cash flow position of $-3,000 pa, or $-57pw before tax. The goal was to be as close to neutral cash flow as possible considering future lending requirements.

We can argue that over time rents will go up, but there's no guarantee of this. And at the same time expenses will be going up too, including body corp fees and council rates, which are guaranteed to increase. Then there's interest rates which will eventually rise again.

My question is at what point will this property move into neutral/positively geared territory, and is it based off rising rents alone? I suppose at some point we could throw some money into the loan and have it recast, lowering interest repayments. Probably not very tax effective though.

 

[macca446]

Hi,
For myself I use 10% as guidline.

Macca446

 

[D.T.]

I'm looking at IP#1 which yields 7.8% gross. After expenses (which being in Qld are quite hefty) and vacancy etc I'm looking at a net cash flow position of $-3,000 pa, or $-57pw before tax. The goal was to be as close to neutral cash flow as possible considering future lending requirements.

We can argue that over time rents will go up, but there's no guarantee of this. And at the same time expenses will be going up too, including body corp fees and council rates, which are guaranteed to increase. Then there's interest rates which will eventually rise again.

My question is at what point will this property move into neutral/positively geared territory, and is it based off rising rents alone? I suppose at some point we could throw some money into the loan and have it recast, lowering interest repayments. Probably not very tax effective though.

That same purchase, without queenslands hefty bodycorp, council and insurance costs would likely be neutrally or positively geared. Queensland is pricey!

The cashflow equation has as much to do with whats coming out of your bank as it does about whats coming in.

 

[Terry_w]

Since you mentioned gearing you will find it is neutrally geared when the cashflow and the tax back from negative gearing is neutral.

So you have to work out what all the non cash deductions are and then how much tax you would save and take this into account.

 

[jaspn]

Sorry, I've probably used the wrong terminology here. I should have said neutral/positive cashflow, not geared. I don't consider tax benefits in my figures or decisions and any benefits I do get are simply a bonus.

 

[WilliamB]

Hi Jason, in my mind, if you are referring to cash flow, you really should consider tax benefits, as they are a cash "benefit" from gearing. I believe it is paramount to have an understanding of tax effect. You may find you are already cash flow neutral.

If you incorporate tax benefits into your monthly PAYG (assuming you are an employee) with a PAYG variation, it may have quite a large effect on your monthly cash flow, by reducing tax payable to account for the gearing.

Sorry if I have misinterpreted your query and it may be a little off topic, but when we owned a larger portfolio, it made a significant difference to our cash flow.

Cheers,

 

[slammindan]

To calculate buying cost the approx figure is about 5% of purchase price. Is there a similar method to work out approx tax benefits? I have PIA but I think I'm falling into the trap of Garbage in, Garbage Out.

Thanks

 

[Paul@PFI]

Cashflow +

Cashflows tip.

I have always found an excel spreadsheet a useful device. You can model annual property income and expenses and project 1,2, 3, 10 etc years. Maintain it and revise it. As interest rates change, expenses etc. Rent increases etc. It will give you the answer.

 

[nhg]

My question is at what point will this property move into neutral/positively geared territory, and is it based off rising rents alone? I suppose at some point we could throw some money into the loan and have it recast, lowering interest repayments. Probably not very tax effective though.

Neutral geared is obviously when outgoings = incoming.

I also don't count tax breaks, and for good reason, I haven't earned a single dollar in personal income this year, what tax breaks could I claim?

I'm sure you know the answer already, to make it neutral from a negative cashflow position:
a) pay down debt, which is cheating in my books and is counter-productive at the accumulation phase;
b) renovate or add value to increase rental yield;
c) pray rents go up on their own.

There's only one obvious answer to me. The question is, what can you do to add value to that house? Cosmetic or structural reno? Add a granny flat? Rent rooms individually? Holiday rental? etc.