Increasing Portfolio

[WebBoard]

From: Mike .


Help! I need some advise
From: Judi
Date: 02 Oct 2000
Time: 19:21:29

Help! I need some advice regarding the timing of buying more IPs. We have 3 IPs that are mortgage free, and 2 IPs ( 1 commercial and 1 residential) that we still owe on. The problem is that they are all creating positive cash flow, and therefore liable for more tax.

The spouse wants us to negative gear into shares, but I'd rather stick with what I know (something you can see and a rent cheque at the end of the month), and with shares a dividend cheque doesn't go near to covering the interest.

Should we have been perhaps a little less smart, and not as enthusiastic about paying out these loans, and bought more IPs earlier?

Your comments from previous experiences would be appreciated - Judi

 

[WebBoard]

KathrynM

Reply: 1
From: Mike .


Re: Help! I need some advise
From: KathrynM
Date: 30 Nov 2000
Time: 16:07:06

I'd love to have your problem! However, I don't think the question is simply one of negative gearing or not, but more a question of the overall rate of return and leverage.

If you are highly leveraged (in property or shares) then the return (IRR or cash-on-cash)on "your money" is much higher up to infinite (where the property is cashflow positive and wholly financed). Whereas if you don't have a mortgage, then the return (rent and capital gain) must be divided by the much larger figure of "all your money that has been paid into the property".

ie your current rate of return is possibly lower than if you increased your leverage and bought more properties (or shares). As a side effect this may bring you less cashflow positive.

Sorry, I'm not sure how to express this better - spreadsheets say it perfectly.

 

[WebBoard]

Marina

Reply: 1.1
From: Mike .


Re: Help! I need some advise
From: Marina
Date: 02 Oct 2000
Time: 23:41:10

A seminar I went to really opened my eyes about paying tax. The majority of the people in the room hated paying tax. They did not want to pay tax. I was one of those people. Then the speaker explained that when you make a loss of $2000 and you have a tax rebate say of 50% you will get back $1000. So in actual fact you have lost $1000 of your own money.

Now if you made a PROFIT OF $2000 you will have to pay back $1000 and you are $1000 in front plus you still have your $2000 that you did not have to outlay. Does this make sense? Or a simpler way of putting it is YOU LOSE $1 to make 50c or YOU MAKE $1 lose 50c

Which would you prefer? - Marina

 

[WebBoard]

SteveP

Reply: 1.1.1
From: Mike .


Re: Help! I need some advise
From: SteveP
Date: 04 Oct 2000
Time: 23:06:29

Right on! I went to a seminar recently advocating gearing into shares. The stockbroker asked who wanted to pay more tax and whilst I was the only one who put my hand up, even the stockbroker didn't understand!! Tax on profits or subsidized loss - it's not a tough call.

 

[WebBoard]

Terry A

Reply: 1.1.1.1
From: Mike .


What a great and simple way to explain it.
From: Terry A
Date: 03 Oct 2000
Time: 01:05:06

Dear Marina,

I like the way you express the concept that it is better to make a profit and pay tax than to make a loss and only get some back. I see it all the time where people just hate paying taxes so much that they will do anything to avoid it, even giving it to the banks instead.

Last time I looked the banks weren't building schools, hospitals or roads... unless you count lending it to the government as providing the facilities which make Australia such a great country to live in. Look around the world and realise that our standard of living is great and it doesn't come free...

 

[WebBoard]

Bob

Reply: 1.1.1.1.1
From: Mike .


Re: Help! I need some advise
From: Bob
Date: 03 Oct 2000
Time: 07:09:18

I'm with some of the others here - you pay tax on your profits, and I love profits. However, if you object to that (or you want to use your income more effectively) why not neg gear an IP that shows promise of significant capital gain or use the equity available to buy positive geared property - more income (which is what most of us want).

Kiyosaki and Somers both point out that a lot of folks make a pile with what they know and view themselves as gun investors, but then go into a new field and blow the lot. This may or may not apply in your case - for all I know, your husband may be Rene Rivkin's private advisor.

On shares, I reckon the bear market is coming for the stock market, and you don't get a margin call on housing. If you are new to shares, do as the ASX recommends and pretend to buy the shares ("paper trading"), then follow them in the papers for a while. Factor in all the costs (like interest, brokerage and GST) and see how you go. Cheap education.

 

[WebBoard]

Gary

Reply: 2
From: Mike .


Re: Help! I need some advise
From: Gary
Date: 02 Oct 2000
Time: 23:15:27

Personally I don't have any problem with making money and paying tax on it, but there could quite possibly be something wrong with me

While it certainly is possible to buy shares where the dividend covers the interest, if you are after negative gearing, shouldn't you be buying ones that pay a very low dividend to minimise the income and maximise the expenses? Otherwise you would just be adding to your 'making too much money' problem.

Gary

 

[WebBoard]

Terry A

Reply: 2.1
From: Mike .


How much is too much?
From: Terry A
Date: 03 Oct 2000
Time: 01:00:15

Say that again. I agree totally with the idea that it is better to make money and pay tax if you have to than to lose money and get some back. In the first case you are up, in the second you are down. But then you lost me, negative gearing to lose money so you can solve having too much money. Nope I just can't wrap my mind around that one.

 

[WebBoard]

Ric G

Reply: 2.1.1
From: Mike .


Re: How much is too much?
From: Ric G
Date: 04 Oct 2000
Time: 13:05:46

The whole concept of negative gearing is not to lose money for the tax break full stop.

The idea is that the capital gain associated with the investment will more than compensate for the (after-tax) outlay associated with the investment. So if I pay $15,000 net per annum after tax to run an investment property, and the property grows at $30,000 per annum then I'm in front. If the property doesn't appreciate then I'm behind.

Now whether negative gearing is a good idea or not is another issue.

 

[WebBoard]

Robert

Reply: 2.1.1.1
From: Mike .


Re: How much is too much?
From: Robert
Date: 04 Oct 2000
Time: 22:36:30

But if you can buy a property that is +geared and get good capital growth then why would you buy a neg geared property?

Robert

 

[WebBoard]

Ric G

Reply: 2.1.1.1.1
From: Mike .


Re: How much is too much?
From: Ric G
Date: 05 Oct 2000
Time: 08:49:25

Couldn't agree more.

I just wanted to clarify that there is more to negative gearing than the tax break. I don't think that negative gearing is right for all investors, or all investments, although for some investors negative gearing is a great strategy IF they pick the right assets and have the right time horizon (afterall Jan Somer's whole strategy is based on negative gearing, and this is her forum).