Is negative gearing out of fashion?

[WebBoard]

Reply: 3.1.2.2.1.1.1.2
From: The Wife


Sam,

I think the posting created many good responses, maybe you are taking them personally?
Your way is your way Sam, and it obviously works, my way is my way, and it works, i wouldnt expect someone to try and do what I did and be succesfull, they wont like every aspect of what I did, then they wont use every aspect, and then it will fail, according to my way.
Perhaps you can teach a little about your way, I am sure that everyone would like to hear your story.
I do know some people who think things like wrapping are the holy grail, and wow, yes, its working for them, it wouldnt work for me, i can only see myself using the method in conjunction with other things.But it works for them.
I have had people tell me that my method of investing is wild , really out there, cutting edge,
and I have had people who have told me, that they are so dissapointed at my method of investing, as it is to safe, to boring, will never get me anywhere ( they say this to me as i have flown interstate for a cashflow game, just because I can and I enjoy it and can afford it, and they have to cut their game short because they have to rush of to their night job ?)
the thing is, to find what suits you. ( this sounds like Jude's post now ;o))

Sam, teach everyone about what you have done, this is the forum for knowledge sharing.

TW
~Life is a daring adventure, or nothing at all~

 

[NigelW]

Reply: 3.1.2.2.1.1.1.3
From: Nigel W


Sam

Hear! Hear! to your comment about not just accepting something as an unbreakable investing rule!

You have achieved the goal of most of the people on this forum so congrats!

Like TW, I'd like to hear more details of your story.

Cheers
N.

 

[Anonymous]

Reply: 3.1.2.2.1.1.1.3.1
From: Anonymous


Actually Sam if you are living of passive income from IP's (perhaps a few shares too) then API magazine would like to do a story on you!

 

[WebBoard]

Reply: 3.1.1.1.1.1.2.1
From: Kevin Forster



Kristine

By my calculations the person is actually paying out $14443 per year or $277.75 per week.

This is because the shortfall is 25500 and the government is going to give them $12357. That leaves someone paying the remaining $13143 which is the purchaser. Add the shortfall of $25 per week which adds another $1300 gives a total of $14443 or $277.75

So to own a penthouse with stupendous views actually costs you $277.75. Someone on 30k per year this would take approximately half their gross weekly pay to hold this investment.

Don't worry I understand negative gearing and the financials of it. So why we are on book advice - do yourself a favour and grab a copy of Rich Dad Poor Dad and check out the cashflow diagrams and put the figures in for the above investment and see whether you would buy it.

Kevin

 

[Les]

Reply: 3.1.1.1.1.1.2.1.1
From: Les .




G'day Kevin,

I don't know Melbourne, so could only guess at the cost of a penthouse in the CBD. But to get your figure the purchase price would need to be near $1m.

I suspect you have taken Kristine's "costs" figure as though it were ALL mortgage. In reality, a large chunk of the allowable deductible costs would be "non-cash". As an example, if a reasonable cost of such an apartment is (say) $600k (Wow!!) then mortgage costs at 8% would be $48k if LVR is 100%. At 90%, that drops to $43.2k - and with $38k rental income, the difference is only about $100 per week - then take 48.5% off that to get around $50 /week.

Thanks for posting this, as I'm sure it's an area that confuses many. The whole truth of the situation would depend on the amount of the non-cash costs - and a figure of $20k would not be hard to achieve in this example. These costs are not "out of your pocket", but they are legal deductions.

The actual amount will depend on a number of variables - purchase price, LVR, building cost, depreciable items costs, borrowing costs, IO or P&I, etc. Only once we know these figures can we determine how Kristine arrived at $25 per week. (And I bet she's right ;^) But then, I've heard Melbourne is STEAMING !! Maybe this apartment has jumped in value another $100k in the last week... :^(


And Kristine, to assist others, would you post the figures (mentioned above) that you were using in your example. It will help others to understand the complete situation.

Regards,

Les

 

[Les]

Reply: 3.1.1.1.1.1.2.1.1.1
From: Les .



Doh!! My reply showed "Attn: Kristine" but it didn't show up in the posted reply.

????? (Jeez, I wish I understood computers ;^)


Ah - I had to highlight Kristine's name - this one worked.

Kristine, please respond to the previous post in this string - thanks,


Les

 

[WebBoard]

Reply: 3.1.1.1.1.1.2.1.1.1.1
From: Sergey Golovin


Yes Kristine,

Could you please give us more info (breakdown of all stat’s).

Thanks in advance.

Serge.

 

[Kristine..]

Reply: 3.1.1.1.1.1.2.1.1.1.1.1
From: Kristine .


If anyone can advise me how to take an electronic copy from the PIA program (which is on a laptop) I will happily attach the full analysis for discussion.

And Les, you are right - my figures are correct and have been prepared from depreciation schedules, and are based on full financing with minimal (actually $1,000 deposit) investment. This returns an internal rate of return of 152.67% per year, or a pre-tax equivalent of 296.44%.

And much as I enjoyed 'Rich Dad Poor Dad', give me Jan Somers for investment analysis under Australian conditions, any day.

Cheers

Kristine

Is it possible to copy the file (NOT THE PROGRAM for Copyright reasons, obviously) to floppy from the laptop, then load it into my PC for attachment to a post to the Forum? I could print the PIA, and scan it in, but this uses mega space, and thus would be costly for non-cable users to download.

Looking forward to hearing from the computer wizzes!

 

[WebBoard]

Reply: 3.1.1.1.1.1.2.1.1.1.1.1.1
From: Terry Avery


I believe Ian's solution was to include the capability to send files by
email in the latest professional advanced edition. I don't think there is
that facility in the lower order programs. You could try sending the save
file but I am not sure if that would work. Maybe someone could try, I would
like to know too.

There you go Ian, your users have a function they would like included.

 

[michaelg]

Reply: 3.1.1.1.1.1.2.1.1.1.1.1.2
From: Michael G


Hi,

Try and screen dump (press print screen key and past into word or something). Might enable you to create pics of screen.

Michael G.

 

[karsal]

Reply: 3.1.2.2.1.1.1.3.1.1
From: Sam Vannutini


Hi All.
Thanks for the encouraging replies. I am thrilled that my posting has created some healthy debate.
Do I take it personally? No I don't,purely because I am comfortable with where my wife and I are at in all ares of our lives. What fires me up though is when people become experts with very little runs on the board. Any successful investor will tell you that there is no right or wrong way to invest.
This I do not dispute. My point is that novices should not rely on any one particular strategy. This way of thinking had me one step away from bankruptcy ten years ago. I had read a few books, made 100% on my first property, and yes, I knew it all. Or so I thought.
It has taken me 8 years to put my life together and re climb the mountain.
It has been a difficult journey, but the lessons invaluable.

I never take anything for granted nowadays.

As for the posting on the flip opportunity in Mordialloc, I will not proceed as the valuations are no good. Simple.

What disturbs me on this forum is that as soon as anyone takes some initiative, there seems to be constant knockers. This was apparent when someone posted a question regarding share options. There were plenty of replies by people who do not fully understand what is involved. There are many of us who make a good income from trading options. Yet some who may have failed are quick to dismiss them as too risky. Ask any successful trader, and they are likely to tell you that options are less riskier than shares.
As TW will agree, we must always question and research any proposal. However, please do so in a mature manner.

By the way TW, loved the article in the Property Investor Magazine. It should serve as a great inspiration to others as it did to my wife and myself.

One of my hobbies is as a coach for other investors. I tend to focus more on the personal side of investing as I believe that wealth creation begins and ends in the mind.
This is my way of showing leadership towards others. Profits from the business go to charity. What am I on about?
Well, it gets back to sharing my story with others. I will soon launch my website that will give you all the background that you need. I will keep you posted.

Have a wonderful week, Sam.

 

[Les]

Reply: 3.1.1.1.1.1.2.1.1.1.1.1.2.1
From: Les .



G'day Kristine,

Sorry, mate - I can't help with ideas re getting PIA output into a forum post - these computers are just a bit beyond me ;^)

Could you instead just post the following:-

Purchase Price
Cap Allowance
Borrowing Costs
Depreciation

I think you've already confirmed it is $1000 down, so LVR will be around 105%, IO at 8%.

Thanks in advance,


Les

 

[Kristine..]

"Is negative gearing out of fashion? Long post, fo"

Reply: 3.1.1.1.1.1.2.1.1.1.1.1.2.1.1
From: Kristine .


Dear All

Here is a demonstration printout for you to ponder and think upon the wonders of leverage, and how through negative gearing, that is, efficient use of our compulsory, pre-paid tax, we can buy and hold significant property for our long term benefit.

Please understand, that in preparing these analysis, I have had to make a number of assumptions as well as applying known contractual details.

Please print these pages so that my explanation can be correlated to the spreadsheet format. You are welcome to email me with any questions, and I will answer directly plus a summary of questions in the forum.

(i) Property Value. This is the actual Contract or Purchase Price of the property. ($585,000)

(ii) Purchase Costs. I simplify this to actual Victorian Stamp Duty entered here ($30,760)

(iii) Please note Loan Costs further down the list, but important to mention at this point. I allow 1% of purchase price to cover conveyancing fees, broker or bank charges, searches, miscellaneous stamp duties etc ($6,210)

(iv) Outlays: Allow $1,000 deposit not recovered at settlement ie the actual personal investment paid as a preliminary deposit remains with the investment. ($1,000)

(v) Loan: the total estimated Loan Cost here is the Property Value + Stamp Duties – Deposit Paid + Loan Costs ($620,970)

(vi) Obviously, by borrowing more than the contract price, equity in the property will be negative at commencement of the first year of the investment (-$35,970)

(vii) Capital Growth: In the absence of a crystal ball, this is a tough one! To present a most conservative picture, I use an allowance of 8% capital growth. This is not intended as an indication or opinion, simply a figure for the purpose of the exercise.

(viii) Inflation Rate: This is important in this instance, as the rent is indexed and the program must be told the indexation rate. Thus, inflation is 3% and any other indexation within this spreadsheet will be at this rate.

(ix) Gross Rent: I am using an example of a leased property where the terms and conditions of the lease are known,. In this instance the rent is neither gross nor net. The tenant pays all outgoings concerned with the safe, efficient and effective operation of the building eg all body corporate fees and charges, all insurance, maintenance, operating expense, necessary capital works etc for the life of the lease (which, with options, could run through to 30 September, 2025), and the incoming owners pay municipal and statutory charges such as municipal and water corporation rates (no garbage fees or water consumption as these are the responsibility of the tenant) and state land tax if appropriate to the individual owners.
Please note that the first indexation of rent occurs at the commencement of the third year and then annually. (First rent $38,025 per annum)

(x) Interest: As repayment of principal borrowing is not relevant to a taxation model, I have entered loan details at averaged 8%per annum, interest only. ($49,678 per annum)

(xi) Property Expenses: As explained under rent, outgoings for which owners are responsible are minimal. Property expenses are indexed, thus the annual increase of 3% (and remember, the 3% is there because the lease is indexed etc) (allow $2,000 first year)

(xii) Pre-Tax cash flow. Up to this point the age or type of property does not impact on the analysis, and cash income is significantly less than cash expense. However, the property I am presenting carries particular depreciation benefits, which are not cash based and are actually the amortization of the asset at varying rates and over varying times as specified under Tax law. Here is where the whole process gets very interesting! (-$13,653 first year)

(xiii) Depreciation of the Building: This example carries an unusual depreciation benefit, that of 25 years at 4%, and even though the building was constructed in 1990, the depreciation benefits to the new purchaser commence from the date of subdivision last year. So, the full amount to be written off is approximately $118,875, at the rate of $4,755 equally per year

(xiv) Depreciation of the fittings: There are quite a number of different items here, from the small item kitchen pool, to a pro-rate share of the lifts, fire service and swimming pool. I have shown an aggregate sum, and small amounts of depreciation can continue to be claimed up and until the 34th year. Please note that because items must be fully depreciated by the end of their allowable period, the amounts of depreciation claimed may contain final balances, and totals may fluctuate because of this. ($5,828 first year)

(xv) Loan and other Costs: Can be written off over five years ($1,242 per annum)

(xvi) Total Deductions: Here is the nitty gritty! By adding cash and non-cash deductions together, we see that the surplus expense comes to $25,478 in the first year

(xvii) As Australian tax brackets change in defined steps, for every dollar earned above $60,001, we are taxed $485/$1000. Thus, for the purchaser earning $85,478, by claiming $25,478 they have effectively reduced their taxable income to $60,000, and are therefore owed a refund of overpaid tax of $12,357. I previously mentioned s.221.d and the ability to reduce tax payments on a weekly instead of annual basis, thereby directly contributing to the cash flow of the investment.

(xviii) The after-tax cash flow, a shortfall of $1,296, is calculated at $25 per week, which would need to be contributed from other sources.


***
For a purchaser earning a Gross Income of $30,000, their ability to claim tax is limited to a refund of $5,830, as their tax structure was $10,000 @ $315/$1000 = $3,150, plus $14,000 @ $185/$1000=$2,590, plus $1,478 @ below the tax free threshold (and no, I don’t know where the PIA found the other $90).

This purchaser would then have to make up a shortfall of $7,823 per annum, or $150 per week, at least in the first year.

****
In reading the summary, be aware that the spreadsheet follows the assumptions exactly, and has calculated that the deposit plus contributions has earned the equity as displayed.

Should the property be sold – the program calculated ‘selling costs’ plus the capital gains tax applicable to that individual owner if they sold the property in a year when their personal taxable income level was as described in the Assumptions. Should the property be sold in a year of for example unemployment or retirement, the CGT burden would be considerably less.

All in all, its not a bad return for a $1,000 deposit, is it?

Happy analysing

Kristine

NB After a number of unsuccessful tries to load the complete file which includes scans of the PIA spreadsheet, I will copy type it tomorrow and post it separately. Actually, it may be that the complete file exceeds webboard limits; maybe someone could advise on that subject?

 

[Les]

"Is negative gearing out of fashion? Long post, fo"

Reply: 3.1.1.1.1.1.2.1.1.1.1.1.2.1.1.1
From: Les .



Kristine,

Thanks for that - Gee, my guess at $600k wasn't too far off. What an astounding price, but we are talking CBD Melbourne ...

That is a very complete description, even without the spreadsheet. And it's those HUGE Capital Allowance and Depreciation costs that brings a 6.1% rental return (with an 8% mortgage) to being close to neutrally geared. Before seeing this, I would have thought a 6.1% rental return on 8% would HAVE to be heavily -ve geared.

With today's mortgage rates, this could be a classic +ve geared, high Capital Growth example.

Kristine, I have no knowledge of this kind of property. Is a rental of $730 per week, plus all Body Corp, special levies, etc paid by the tenant really a viable kind of figure? Do people in central Melbourne take on this kind of lease? (My head is straining with the magnitude of the numbers ...)

I realise this is a sample and not an actual property. But I am imagining it bears some semblance of reality - correct???

A fascinating example - Thank You

Regards,

Les

 

[Jakk]

Reply: 3.1.2.2.1.1.1.3.1.1.1
From: Jakk Bass - The SLUM LORD


G'Day Invesorsaurus Sam,

Let me firstly applaud you in reaching the status of sitting back, drinking stubboirs and living off a passive income achieved through property investment.
A dream of so many on this forum.

I await with anticipation the coming of your website as I am sure others on here do as well.

It is always a great motivator to read of someones success and it reinforces in people, "if he has done it, then maybe we can too".
I too was on the verge of bankruptcy 10 years ago and the value of the lessons learnt then will stay with me for life.
Number 1 of Jakks ten commandments of property investment is
*Never own negative geared property*
and all the figures, calculations and theories of those that tell me I am wrong cannot convince me otherwise.
That is just the way I do things nowadays and it works for me, but on the other hand I am sure the Negative Gearing disciples have their own success stories to tell.

regards
Jakk

enjoy the following:

What do you call a Gay Dinosaur?
- A Megasuarus
What do you call a Gay Dinosaurs Dog?
- Megasaurus Rex
What do you call a lesbian Dinosaur?
- A Lickalottapus

 

[WebBoard]

Reply: 3.1.1.1.1.1.2.1.1.1.1.1.2.1.1.1.1
From: Kevin Forster



Before we get too excited by the whole deal lets look at it objectively and from a pure cashflow perspective.

From the figures the cashflow shortfall is $13,653. At 48% marginal tax rate the deduction for the loss is $6553 leaving $7100 to be paid. This equates to $136.00 per week that needs to be found.

Never ever call deductions income!!Deductions are deductions and not income. This would be like calling a donation to your favourite charity income. You don't pay tax on deductions and don't include them as income on your tax return. Deductions simply reduce your taxable income.

Deductions should always be seen as the icing on the cake and not included in the overall calculations. The reason you do this is in case (God forbid) something stops your ability to earn and you're on the dole, the amount able to be claimed by deductions would reduced significantly. So deductions should not be used for your ROI or IRR calculations. I notice a lot of 2-3 tier marketers use deductions to hide the true cost to the purchaser.

Some people may think I'm being pedantic about this but if you want to invest to reduce taxation, film schemes, olives, ostriches, etc are much better at achieving this.

If you're investing to create wealth or income then don't include non cash deductions and look at the deal and then ask yourself "Is this a good deal and can I afford it?". If it is, go for it otherwise there will always be another one.

Kevin

 

[Kristine..]

"Is negative gearing out of fashion? Long post, fo"

Reply: 3.1.1.1.1.1.2.1.1.1.1.1.2.1.1.1.2
From: Kristine .


<PRE>Les:

This is an actual property, which I am currently selling (not spam and no promotion intended). I am offering this analysis for the purpose of discussion. I hope everyone finds it interesting.

Great oaks from little acorns grow!

Cheers

Kristine

Transcribed from actual property file
PROPERTY INVESTMENT ANALYSIS SPREADSHEET

Property: Penthouse Melbourne CBD – Freehold Apartment,
10 year indexed lease plus 3 further options 5 years each
Description: Calculation based on Interest Only loan,
Example “A” 48.5% Tax Bracket Example “B” $30,000 PAYG single rate

SUMMARY
Assumptions Projected results over 5 years
Property value $585,000 Property value $859,557
Initial outlay $1,000 Equity $238,587
Rent $731 After tax “A”152.67%
return per year “B” 78.51%
Cap growth rate 8.00% IF SOLD
Inflation rate 3.00% Selling costs & CGT “A” $91,289
“B” $83,680
Interest rate 8.00% Equity “A”$147,298
“B”$154,907
Marginal tax “A”48.5% After tax “A”130.65%
rate “B”$30,000 return per year “B” 60.51%

COMPUTER PROJECTIONS
Investment Analysis Projections over 5 years
Year 2001 1 year 2 year 3 year 4 year 5 year
Property value $585,000 631,800 682,344 736,932 795,886 859,557
Purchase costs $30,760
Outlays $1,000
Loan $620,970 620,970 620,970 620,970 620,970 620,970
Equity -$35,970 10,830 61,374 115,962 174,916 238,587
Capital Growth 8.00% 8.00% 8.00% 8.00% 8.00% 8.00%
Inflation Rate 3.00% 3.00% 3.00% 3.00% 3.00% 3.00%
Gross rent/wk/yr $731 38,025 38,025 39,166 40,341 41,551
CASH DEDUCTIONS
Interest (I/O) 8.00% 49,678 49,678 49,678 49,678 49,678
Property expenses 5.26% 2,000 2,060 2,122 2,185 2,251
Pre-tax cash flow -$1,000 -13,653 -13,713 -12,634 -11,522 -10,378
NON - CASH DEDUCTIONS
Deprec-building 4.00% 4,755 4,755 4,755 4,755 4,755
Deprec-fittings $50,875 5,828 7,011 5,265 4,096 4,722
Loan costs $6,210 1,242 1,242 1,242 1,242 1,242
Total deductions $0 63,503 64,746 63,062 61,956 62,648
Tax credit “A” 48.5% 12,357 12,960 11,589 10,483 10,232
After-tax cash flow -$1,000 -1,296 -753 -1,044 -1,039 -146
Rate of return (IRR) 152.67%
Pre-tax equivalent 296.44%
YOUR COST (INCOME) “A” p/w 25 14 20 20 3
Tax credit “B” $30,000 5,830 6,114 6,078 5,828 5,882
After-tax cash flow -$1,000 -7,823 -7,599 -6,556 -5,694 -4,496
Rate of return (IRR) 78.51%
Pre-tax equivalent 114.61%
YOUR COST (INCOME) “B”p/w 150 146 126 110 86

Note that the computer projections listed above simply illustrate the outcome calculated from the input values and the assumptions contained in the model. Hence the figures can be varied as required and are in no way intended to be a guarantee of future performance.

Any reports generated by this program may not be sold or distributed as part of any advisory or consulting service and are intended specifically for demonstration.
</PRE>

 

[paulzag]

Reply: 3.1.1.1.1.1.2.1.1.1.1.1.2.1.1.1.1.1
From: Paul Zagoridis


Kevin

thanks for that wonderful post.

Removing non-cash or "book" items from a Profit & Loss statement is basic to fundamental analysis of companies. Property investors can follow sound investment analysis as well.

Cashflow analysis is a great measure of value.

That doesn't mean there is no place for negative gearing in a portfolio. Provided people understand the risks they are taking. Asking "will this investment feed me or eat me if I lose my job?" is a good reality check.

I'm speaking from experience. Insufficient cashflow to support borrowings wiped me out in 1992. The equity I had was irrelevant when the bank sold at fire-sale prices.

Paul Zag
Dreamspinner
Oz Film Biz is at
http://www.healey.com.au/~paulz

 

[yuch.]

Reply: 3.1.2.2.1.1.1.3.1.1.1.1
From: Yuch .


Hi Sam,

At the age of 37, you've already retired and are living on your passive income!! Bravo!!

I am relatively new to other old(er) investors and I am still learning about different investing strategies. I thought negative gearing is for people who are happy to stay in the work force for a long time. I want to retire in 2 ~ 3 years time, and I just can't see how negative gearing is gonna help me achieve my goal. So I've decided to go for positive gearing and as a result I am currently wrapping my way to financial freedom.

If you have a better way than positive cashflow, would you mind sharing it with all the forum members?


Regards
yuchun
~ The secret to success is to start from scratch and keep on scratching. ~

 

[WebBoard]

Reply: 3.1.2.2.1.1.1.3.1.1.1.1.1
From: P Plate


I still don't understand the "wrap" idea. Do any books explain it?