Neg Geared - Cash Pos

[WebBoard]

From: Jason Prestwidge


I thought a new thread may be in order here.
Can someone explain to me the calculation method to work out if I am Neg geared and cash pos or neg.

I know I am neg geared, but if I am getting a tax cheque back , that would surely mean I have lost on the deal and I am cashflow neg.

Please explain!!!
Jason.

 

[WebBoard]

Reply: 1
From: Donna Larcos


I would say your are negatively geared but
cashflow positive otherwise known as
positively geared. The tax refund is
usually coming from depreciation on the
property which is not an "out of pocket"
expense at least in the short-term (wait till
those 1970s kitchens catch up with you).
In the hunt for wealth I will take money
from any source offered and if the tax man
is wearing the hat this week I am a happy
woman.

Donna

 

[Rixter]

Reply: 1.1
From: Rixter ®


Hey Donna,

Negatively Geared - is when all your incomings are LESS than all your
outgoings AFTER all tax deductible items have been claimed for.....ie
Someone in this situation has to PAY out of their own pocket to bring the
deal up to a break even scenario from their AFTER tax dollars.

Positively Geared - is when your incomings are GREATER than all your
outgoings but BEFORE claiming any tax deductible items that can be
claimed for...ie Someone in this situation has to PAY further tax on the
surplus cashflow.

Cashflow Positive - is when your incomings are GREATER than your
outgoings AFTER all tax deductible items have been claimed for...ie
Someone in this situation has ALREADY paid tax on the surplus
cashflow.... In other words they have more cash in their hand AFTER paying tax than they would have had if they did not hold that property in the first instance.

A property can only be Cashflow positive if it is acquired with 100% of
the purchase price plus buying costs from borrowed money.


Hope this helps

Happy Investing,
Rixter

 

[WebBoard]

Reply: 1.1.1
From: Donna Larcos


In that case my property would not fit into
any of the above categories.

My income is less than outgoings but not
after all items claimed. The incomings
are not greater than outgoings before
claiming tax deductions and I don't pay tax
on "surplus cash flow" because there is
none. But I do have cash in my hand that I
would not have had if I had not held the
property in the first place i.e. the tax
refund.

 

[Sim]

Reply: 1.1.1.1
From: Sim' Hampel


Donna, according to Rixter's definition...

If your incomings are less than your outgoings before tax then you are negatively geared.

If your total incomings after tax are greater than your outgoings then you are cashflow positive (property puts money in your hands after tax).

So if I understand your description correctly, you have got yourself a "negatively geared, cashflow positive" investment.

 

[Sim]

Reply: 1.1.2
From: Sim' Hampel


On 10/6/01 5:50:00 PM, Rixter . wrote:
>
>A property can only be
>Cashflow positive if it is
>acquired with 100% of
>the purchase price plus buying
>costs from borrowed money.
>

Hmm... Rixter, I assume this statement is just one of the "rules" that you use for determining whether an investment is cashflow positive ?

In other words... you are saying that a negative cashflow investment that is made cashflow positive by putting in enough deposit so that income exceeds outgoings (by decreasing the amount of interest paid because of a smaller loan size), is NOT a truly cashflow positive investment.

I term this "buying" your positive cashflow, as you put your own money into the deal to achieve this situation.

For all the newbies who are confused by all this... don't worry... it's all just semantics.

I personally don't believe that you should judge a deal ONLY by whether it is cashflow positive or not. This is but one measurement of many that should be weighed to determine whether the deal is a good one !

And just because it is NOT cashflow positive does not necessarily mean that it is a bad deal.

And to repeat myself once more... just because it IS cashflow positive does not necessarily mean that it is a good deal (in my personal opinion) !!!

 

[WebBoard]

Reply: 1.1.2.1
From: Donna Larcos


Ultimately what I am looking for is capital
growth. The property postively geared,
cashflow positive, negatively geared etc
doesn't matter to me as long as I can
afford to hold it for the capital growth. You
could have a property that is giving you
$5000 a year in income from rents after
expenses but there is no capital growth.
You would have to have 10 of these to
make $50,000 per year. Or I could have 3
properties worth $250k appreciating at
10% p.a. and it costs me $10k a year to
keep holding them but I'm not paying tax
on that growth and I get tax relief on the
holding cost. There are always trade-offs.
You still need to be able to afford the
loans. Of course the tax deduction means
you've "lost money" or equity in terms of
depreciation but the capital growth more
than offsets this... or it
should.....otherwise what's the point?