positive gearing

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From: Kevin Fielding


Hello all,
Could someone please give me some advice regarding the advantages of positive geared i.p's over negative geared i.p's.
Thank you.
 
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Reply: 1
From: Glenn Mott


With a positive geared IP, you can set up a separate bank account into which the tenant deposits rent. Out of this account comes loan repayments, rates, insurance and taxes. You never have to put money in yourself and in due course, the account balance will rise to the point where it will fund the start up costs of your next purchase.

With a negative geared property, you can also set up a separate account into which the tenant deposits rent. Out of this account will come loan repayments, rates, insurance and taxes. Because the outgoings exceed the incomings, you will need to continue going to work to subsidise your tenant's standard of living. If you don't mind this, you can continue doing this until the rent finally exceeds the outgoings.

Regards

Glenn
 
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Reply: 2
From: Tibor Bode


Hi Kevin,

The difference between an asset and a liability is that an asset puts money into your pocket a liability takes out of it even if you get back half of it. It is Rich Dad's saying and I fully agree with it.

At the same time, I acknowledge that in specific situations a negatively greared property might be appropriate.

Tibor
 
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Reply: 2.1
From: H T



Tibor

I'm one of those suckers that purchased a negative geared property...boohoo made 25% cap gain in 1 year, but had to sacrifice the princely sum of 150$ a month to keep the thing afloat. The 60k in equity I've "made" has been just about covered the costs. ;)

more than one way to......

HT
 
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Reply: 2.1.1
From: Glenn Mott


Congratulations HT, you have made yourself a nice little stack of cash from buying well and selling into a rising market.

For those of us like Tibor, Kevin and myself who may not be able to identify properties $40k under market value but still wish to participate before we are masters, buying properties that do not drain our cash is a pretty sound way to go.

HT can eliminate risk in buying properties that do not show neutral or positive income by knowing the median values of land and buildings in the area he buys and buying those properties under the market value in a time when property prices are rising, employment is strong, interest rates are low and sentiment is high...he does not guess.

Please seek several opinions before negative gearing.

Glenn
 
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Sim

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Reply: 2.1.1.1
From: Sim' Hampel


Why don't we look at this a different way rather than simply rehashing the old +ve vs -ve argument ? Let's look at some facts:

Fact 1. Capital growth is an effective way of building wealth.

Fact 2. Cashflow producing assets are an effective way of increasing lifestyle and/or servicing debt.

Fact 3. Most property in Australia that is likely to see good capital growth is going to cost more to hold than you will receive in rental income - hence it will be cashflow negative (also called negative gearing).

Fact 4. There is a real limit to the amount of growth property you can hold title for, which is determined by the cost of holding them and the cashflow you have available to cover that cost.

Fact 5. One possible means of covering the costs of growth property is to purchase assets which provide you with cashflow, such as cashflow positive properties, businesses, shares and so on. Growth assets and cashflow assets can both be used in your portfolio - you do not have to choose between one or the other.

Fact 6. It is possible to find property that is both cashflow positive and experiences decent capital growth. You may have to look hard for it though.

Fact 7. It is possible to turn a cashflow negative property into a cashflow positive one using techniques such as adding value by renovation.

Fact 8. It is possible to invent capital gains by using techniques such as buying below value and/or adding value by renovation or subdivision.

Fact 9. There are as many ways to successfully invest in property as there are property investors. Find a way that suits you.

Fact 10. The strategy called "negative gearing" is a tax minimisation strategy. The strategy called "buying for growth" is a wealth building strategy. These two strategies look very similar to the untrained eye.

Fact 11. You can increase your wealth by minimising your tax. You can also increase it by spending less time worrying about the amount of tax you pay (let your accountant do that for you), and concentrating instead on increasing your wealth by investing wisely. Don't lose sight of why you are investing by concentrating too much on tax.

Fact 12. Too many people mistake fact for opinion.

Fact 13. I could be wrong about many things.

Fact 14. There is nothing new. It has all been done before in one form or another.

Fact 15. Some people fall asleep before they reach the end of my posts.

 
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Reply: 3
From: Steve B


From my personal experience, (See my recent post on WARNINGS TO OTHER NEWBIES 6/5/02) . My advice would be, if you are unable to get a start in I.P's unless you use NegGear, have a go, BUT, be very careful, it's not as good as it appears. My honest opinion would be to buy neutral or positive cash flow properties if you can.
Steve
 
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Reply: 2.1.1.1.1
From: J Parker


Zzzzzzzzzz...............

Only joking Sim! I like reading your posts as they can be informative and entertaining at the same time! I agree that there is no right or wrong "technique" when it comes to property investing. There are as many ways to skin a cat...

It really is all about finding out what you want to do and going with it. Your niche..!

Don't get into renovating if tradesmen give you stress attacks.
Don't go down the wrap path if you are a poor communicator and don't think you could tell someone to "pay up or else!".
Don't buy off the plan with an 18 mth settlement if you can't sleep at night worrying about whether or not you can actually settle.
Don't negatively gear if the thought of interest rate rises and poor vacancy rates send you into panic attacks.

Do, however, do your due diligence and make sure you are researched enough to make an informed decision. Take into account what you can afford with negative gearing, as it can hurt when you are tightening your pursestrings so much that lifestyle takes a serious nosedive. What is the point of giving up Tim Tams and all that is good in life (holidays, Baker's Delight bread, occasional splashouts at fine eateries etc) for an investment property that will take time to grow? Fine, if you can afford it and have factored this in. But if you're eating HomeBrand tuna and delaying all the "good stuff" for 10 years or so (until those properties are positively geared and you can sell off a couple to finally afford that Surfers holiday) then what fun is there in that?

I'm a firm believer that well selected property will reward you- whether it be short or long term, that's your decision. I'm happy enough to balance my neg geared portfolio with some positive ones. That way, I can still continue my lifestyle and get the goodies in the end. I don't want to be paying big bucks out each week on all my properties. Neither do I want to be forced to downgrade my lifestyle because I didn't think things through enough when I purchased.

Don't get me wrong- I'm a budget conscious mum, so I do look for cheaper brands and my lounge definitely needs an update..But, I am living what I consider a comfortable life and am still accumulating properties, without altering my lifestyle right now. Hopefully, with time, I will be in a better place financially in nine years time (1 year down of the 10 year plan!) but, for now, I'm enjoying life just the way it is.

Now what were we discussing here? Sorry all for the rambling. Sim got me started!
Cheers, Jacque :)
 
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Reply: 2.1.1.1.2
From: Gordon Austin


Great response Sim. It does get somewhat annoying when some continue to preach one way of making money as being superior to another.

Just like shares you can focus on those that are oriented toward growth or those that are oriented towards income (eg dividends). And some like the banks have given both over time. Neither approach is wrong - it just depends on what the individual feels comfortable with and their circumstances at the time.

Personally I like the idea of having a good blend of both over time. But then again I've still got a lot to learn so it will be lots of fun learning along the way. At least in the end I can say that I kept an open mind and tried both.

Gordon
 
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Reply: 3.1
From: Gail H


Hear hear Sim.

Negatively geared properties in high growth areas can certainly build great wealth, but best not to buy on the crest of a wave (ie. now). I also agree with the point about not wanting to sacrifice current lifestyle too much. Consequently, I go for neutral cashflow in moderate growth areas.

Gail
 
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Reply: 2.1.1.1.3
From: Nigel W


Couldn't have said it better myself.

I like your style Sim' and that's a FACT.

N.
 
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Reply: 3.1.1
From: Rixter ®


Gail,
Can you describe what you call Neutral Cashflow and provide an example please?
Happy Investing,
Rixter :)
 
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Reply: 3.1.1.1
From: W W


Why not have a combination of cashflow property and high growth property. That way they tend to balance each other out.

Actually, if you are working, then I think most newish property in Sydney should come in at about cashflow neutral with the current low interest rate. That is when depreciation etc are taken into account, the property shouldn't cost you anthing to hold because you get the big tax refund which makes up for the low rental yield.

Passive
 
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Reply: 3.1.1.1.1
From: Mark Laszczuk


Mostly pretty excellent responses. Good to see lots of balanced opinions on the forum. My strategy (after going to Steve's Navra's course) has changed tack. He sat down with my partner and I and set out the most convincing strategy I have ever come across. Seriously, I was speechless afterwards, I literally did not know what to say. Just goes to show that there is plenty of room for change in any investment style. I'll leave you with these words of wisdom: "I've met people who have become wealthy through negative gearing, I've met people who have become wealthy through positive gearing. As long as you're getting to where you want to be, there is no wrong way to invest." Dale Gatherum Goss. This quote will stay with me for the rest of my days.

Mark
'no hat, some cattle'

P.S. Tibor, good to see you think highly of RK (I do also, regardless of my post in the thread below - he's the one that got me started in investing, made me believe I could do it). But remember, America's neg gearing laws are very different to ours here. Learn to take that into account when you read Robert's stuff about NEVER EVER negative gear.
 
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Reply: 3.1.1.1.1.1
From: Gail H


Hi Rixter,

I use the term cashflow neutral fairly loosely, but this is a recent purchase:

Two bedroom house near beach on sunshine coast, bought for $125,000 and rented out at $175.

Will be slightly negatively geared, but not by much.

Gail
 
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Reply: 3.1.1.1.1.1.1
From: Mike .


Hi Sim,

As I was scanning the thread titles I thought, "Oh, no, not another positive gearing thread". I was going to bypass it but thought better of it. I'm glad I took a peek. Well done.

Mike
 
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Reply: 3.1.1.1.1.1.1.1
From: Kevin Forster



Actually Fact 3 is not a fact at all. I buy positive cashflow properties (not including deductions) and achieve good capital gains.

I think too many people sell out to this myth and therefore don't negotiate or look hard enough.
 
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Sim

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Reply: 3.1.1.1.1.1.1.1.1
From: Sim' Hampel


Which is why I used a generalisation... "Most property"... if this generalisation was NOT true then we wouldn't need to "negotiate or look hard enough" as you put it.

 
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Reply: 3.1.1.1.1.1.1.1.1.1
From: Tibor Bode


HT, Mark and everyone else,

HT I am very pleased (I really mean it) that you had mad such a good gain. Without trying to be a smart alec, I did the same in 4 months and at the same time I also made money on the rent. It is easy in a market which is going in your way. It is similar to the stockmarket when it is booming. It i s very hard to loose money and there are several "right" strategies and everyone is an expert. This "expertise" and "right" strategies will be tested when the market comes down! I have found several "experts" and "right" strategies suddenly disappeared.
About any strategy time will tell whether it is correct (it will become a FACT) or it was (what all of our writing is) an OPINION. My opinion is based on trying to use some facts
I have learned over the year. It is everyone's own choice and I personally wish to all participants that THEIR specific strategy would succeed.

Regarding to RK and negative gearing. RK stated in one of his books that he made a fortune when negative gearing was abolished in the US back in 1986 (if I remember correctly). The negative gearing issue is not a closed one, just refer to another thread when I mentioned to read Labor and the Democrats view on it. As I am playing with large sum of loan and do not intend to become a bad debt or do a firesale, but want to be financially free (as all of us), to me PERSONALLY it is too risky to gamble on growth and allowances (like negative gearing). I am very keen to reduce the risk of property investment as much as I can and it includes such a things which are out of my control. I hope this might explains my way of thinking. It is NOT right or wrong, just based on what I have learned.

Tibor
 
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