Positive gearing terminology



From: Donna Larcos

I'm just trying to work out the terminology.
Is a positively geared property one that is
giving you a positive return after tax
deductions despite the deposit on the
property? I would have thought that a
property was only truly positively geared if
the return was positive after tax
deductions with borrowing at 106%. I
could make any property positively geared
if I threw enough of my own money at it?
Do most of you use your own money for
10-20% deposits or borrow the lot?

Just curious.
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Reply: 1
From: Rasputin .

Seems to me many people have different concepts of positively geared...

To me the Really positively geared property would pay for itself with none of your own money .. No deposit and paying P&I

But of course that rarely happens so I would accept a positively geared property that covered all out goings .. Rates etc. and Interest on 106% loan

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Reply: 1.1
From: GoAnna !

For me a property is only positively geared when all costs are less than the rent received.

I calculate this on purchase costs (the real costs not just a rough 106%) IO and all outgoings less rent received.

I do not calculate it on P&I as only the interest component is an expense - just ask the ATO!

Personally I do not take the tax deductions into account because I want to see how the property looks standing on its own two feet. I focus on growth and return not tax minimalisation.

I think any deposit paid or above interest repayments made are only relevant to the rate of return on your money.

GoAnna !
(aka Anna before she got real)
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Reply: 2
From: Paul Zagoridis

Hi Donna

"Positive" gearing comes as a reaction to "Negative Gearing". Gearing is the use of borrowed funds to increase leverage in an investment.

Historically, Australian real estate investors have a love affair with borrowing too much money. The interest costs and expenses exceed the income from the investment. The Government has historically allowed these losses to offset other income sources and reduce taxable earnings in the year of loss.

Compare this with business startups and farming where losses must be carried forward and eventually offset against future income.

"Negative gearing" is a industry/marketing term to describe these phenomena.

Positive gearing is gearing to the point where a loss is avoided and a profit shown.

Therefore if you throw sufficient deposit at it ANY property can be positively geared. It is the gearing being described.

Now if you want to brag, then you find an investment that uses totally borrowed funds and still returns positive cashflow.

That is why I refer to positive cashflow properties. Depreciation, and other non-cash deductables may turn a loss into a gain, but I want cash in my hand each month.

Sorry about the length of this reply.


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