How long from negative to positive?

[kals]

Im hoping to buy my first IP in the next month or so and have heard that if buying a negatively geared property, you should look to have it positive by 5 years. In playing with some numbers on PIA I can get to CF+ in 10 years. Interested to know what others thoughts are on this, ie. if 5 years feasible, do you have a rule of thumb etc etc?
thanks

 

[rugrat]

I think it really depends on whether you want it to be positively geared or not. Somepeople will actually have better cashflow because of tax deductions if their property is negatively geared then they would if it were positive.

As for working it out, DH and I have done up a spread sheet to work this out for current year, after 1st year, after 2 year etc, that has all deductable expenses etc on it. I don't know if there is some kind of formula others use or not - we are very new to this, but we just used our own calculations.

 

[Propertunity]

ie. if 5 years feasible, do you have a rule of thumb etc

There's no rule-of-thumb because of the variables:
1. Original LVR
2. IR's on loan - variable or fixed and if variable - how they change over time
3. Rents - and how they change over time

e.g. You can buy cf+ today and have it go cf- after a 0.5% IR rise only to have it come back to cf neutral if you jack up the rent.

 

[Electro]

Sorry to semi-hijack the thread but I think the following question is somewhat related and may help to answer the OPs question.

Generally speaking what rental yeild would you need to cover all costs (i.e. IR's,council rates,insurance, mainentance etc) and for the IP to be considered cf neutral?

Now I know there are a lot of variables to accurately assess this but I'm just curious to find out what others use as a rule of thumb to judge whether the property will be neutral.

Would 1% above IRs be a good number?

 

[RumpledElf]

All three of ours - as in, the one that is almost for sale, the one we are living in and the one we are still getting quotes from to build, so I'm just going on market rental in their areas - would be positive from day 1 if they were rented out. You don't need to wait if you find the right property to buy.

I can point you at one property (in my area) that is for sale right now that would be either positive or darn close to it right now. 7% against the purchase price, assuming $160pw rent, although with some minor tarting up or just asking savage rents (very tight rental market) you could get closer to $200pw or above if you are noxiously savage and don't mind gouging the poor tenants.

 

[Ausprop]

Somepeople will actually have better cashflow because of tax deductions if their property is negatively geared then they would if it were positive.

a $ of tax deduction coud never be worth as much as $1 of income, even if the tax rate were 100%

 

[wylie]

a $ of tax deduction coud never be worth as much as $1 of income, even if the tax rate were 100%

What about someone who is in the position of paying no tax because of being geared? I am not great at math but if negative gearing means you fall into a "pay no tax" category, doesn't this change things?

 

[Propertunity]

What about someone who is in the position of paying no tax because of being geared? I am not great at math but if negative gearing means you fall into a "pay no tax" category, doesn't this change things?

What Ausprop is saying is that, from a cash flow perspective only, (not capital growth), if you lose $1 on the investment, there is no tax strategy that will get you back that $1. Even if you are on the highest marginal tax rate you will only get back 45c in tax for a $1 loss.

If you are in the position of having no tax to pay because you have used up all your neg gearing benefits, then adding another neg geared property to your portfolio will result in a $1 loss being = to a $1 loss.

 

[kals]

Thanks everyone - I guess the take out is that there's no real rule of thumb and there's a raft of variables. It seems as long as Im happy with the numbers it's all good. I recently purchased the PIA software and have been playing around with it - i love it and can't wait to use it on a REAL example!