Define 'Positive Gearing

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From: Toyo Spares


Whilst reading an advert this morning for one of the investment seminars doing the rounds of Melbourne at the moment, I was interested in a comment that said something like "negative gearing is for people who know nothing, what you should be doing is positive gearing IP".

Now, I understand the negative gearing theory but may not be up to speed on the positive gearing theory.

My interpretation of what they are saying is - I should aim to have IP that are cash flow positive (i.e. interest and outgoings are covered by rent and the associated tax refund from depreciation etc. so that I actually end up with some cash leftover in my pocket.

Is this what most of you experienced investors do or is this a strategy and aiming for larger capital growth is another. Alternatively, does it depend on each individual situation.

Toyo
 
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Reply: 1
From: Martin Dorney


I think you should aim for:-

1. Capital growth
2. Yield
3. Tax minimization in that order.

It's worked for me, for many years along the inner bayside suburbs of melb.
Properties that generally have positive cashflows are new properties where you can claim substantial depreciation and building write-offs, however at a price, usually a premium price if new, especially with the G.S.T. Extra premium!

Melb's best capital growth areas seem to be inner bayside areas, where predominetly older style dwellings with land content achieve the best capital growth prospect, with the exception of some new high quality/well built townhouse style waterfront properties.

It also depends on individual tax situations
e.g. whether your gainfully employed, what tax bracket etc. in order to maximize those allowances.
 
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Reply: 2
From: Kevin Forster


The aim of positive gearing is to provide cashflow. Cashflow is what property is really good at providing. If you want capital growth try shares.

Positive gearing is when your income from rent is larger than your outgoings - repayments, management fees, maintenance, etc. so you are left with money in your pocket. Any taxable depreciation, tax deductions are just icing on the cake.

Creating a positively geared property by tax deductions is just creative accounting. In the end it is still a negatively geared property.

I buy in the so called "unfashionable" bayside suburbs of Melbourne. The properties are positively geared and also provide capital growth. The last 5 years have achieved 50% growth in that area.


If you want capital growth - shares are much better at providing it.
 
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Reply: 2.1
From: Dave Tot


Here is a very simple answer to your question.

Neg geared property takes money out of your pocket on a monthly/weekly etc basis

Pos geared property puts money into your pocket.

It's that simple.... weather your aiming for cap gain or what ever you want to use as a plan of attack..... if it does not provide you with + cashflow...it's not positive
 
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Reply: 2.1.1
From: Les .



Kevin seemed to hit it on the head - as I understand it, you can have

1. negative geared (where you lose money on a weekly basis - betting on the hope of Capital Growth)

2. negative geared with positive cashflow (where your losses are returned to you, and more, via the Tax Returns allowed) - it's still negative geared, but it doesn't hurt as much.

3. positive geared (where you make money each week, Tax Returns, or not).

Some subscribe to variations - e.g. increase your deposit to make a property positive geared - but this seems to me to be a "fiddle with the figures" approach which could lead to receiving 0.5% per year on $50k (hardly the way to "make money" - better hope for that Capital Gain to make the difference).

Any other takers?


Les
 
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Reply: 2.1.1.1
From: The Wife


Buy it cheaper
 
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Reply: 2.1.1.1.1
From: GoAnna !


In my terms negative geared with positive cash flow means that you get cash in hand (after expenses) each month yet you have a paper loss which gives you a healthy tax refund. A perfect mix!

Anna
 
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Reply: 2.1.2
From: Toyo Spares


Ok now I think I understand the difference.

Thinking out loud here.

If I was to buy a $280k property using $300k (extra $20k for stamp duty, transaction costs etc. - Borrowing 100%+ is known as "collateral financing". Is that correct ?) of borrowings at say 6% p.a. interest only and get a rental return of say 7% then the additional 1% wouldn't cover operational costs etc. To end up positively geared I would then either have to try borrowing at a lower rate, charge higher rent or buy a cheaper property with a higher rate of rental return.

As far as borrowing at a lower rate is concerned, one would assume this would be done as a matter of course anyway.

With respect to rents, as a rule of thumb, I read that residential property yields are typically 6 - 8.5%. Obviously with any investment, you would aim for a higher yield but in the case of property you would have to weigh that up against the rate of occupancy.

By the way, is yield defined as the % of rental return vs property purchase price or does it also include stamp duty, mortgage costs etc. as well as the running costs (rates, insurance etc.) ?

So that leaves buying a cheaper property. Thinking about this would more likely reveal buying the "right property". Price vs condition vs projected rental return etc.

It's obviously more difficult to positively gear if you borrow 100%+.

What is considered a "rule of thumb" % difference (between interest rate and rental return) for positive gearing ?

I agree with the capital gain recommendation on shares. That's where I have poured all my money up until now. I've diversified between local and international and favoured long term growth potential over dividend yield. Now I wish to diversify into IP.

At this point (being full time employed and being on the top marginal rate) in time I feel I would better off investing for capital gain. The reason I say this is that on the top marginal rate, 48.5% of every dollar returned by a positively geared property would be lost in tax whereas the CGT levied when the gains are realized will be dependant on my income at the time. If this time happens to be when I'm retired and have little other "taxable" income then this could be more favorable.

Obviously there is an argument here that even 51.5% of every dollar earned going into your pocket (positively geared) is still better than 51.5% coming out (negatively geared). This is true and I guess it depends on precise calculations on particular properties with respect to the amount of negative gearing versus the potential for less capital gains.

My aim is to be able to retire within the next 10 - 15 years. How I live in retirement could be off positively geared property or it could be off realized capital gains. Does that really effect what I do next (as far as buying my first IP) ?

As a side note, how far down the coast do you consider "inner bayside" ? Elwood, Chelsea ?

My apologies if I'm rambling. I'm trying to digest as much information as possible before taking the plunge :)

Toyo
 
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