Positive vs Negative

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From: Rob Millington


Am having problems with the terms "Positively geared" and "Positive cashflow". Are they synonymous?
ie.1) Positively geared means that income from the IP is greater than expenses. Y/N? 2) Or can this mean the same as what I understand to be Negatively geared with a positive cashflow? (Meaning that once tax is accounted for the cashflow is +ve)
Many of the posts talk about the benefits of +ve geared IPs, if the answer to 1) is Yes wow!! Ive got to get me some of that.

Regards, Rob.M

 

[michaelg]

Reply: 1
From: Michael G


Hi,

Gearing basically refers to "borrowing money".

Positive means the income is greater than expenses.

Whereas negative is when the expenses are greater than the income.

Positive gearing - getting a loan, and the rent covers both the mortgage repayments and other expenses.

Negative gearing - get a loan but the rent doesn't cover all your costs.

Hope that helps
Michael

 

[WebBoard]

Reply: 1.1
From: Debra L


My definition of Negative, Neutral and Positive gearing is as follows.

Negative Gearing -When you deduct all of the cash and Non-cash deductions (such as depreciation) from the rental income received and you end up with a Negative result. The value of the shortfall can then be offset against any other sources of personal income, such as wage or salary.

Neutral Gearing - When you deduct all cash and Non-cash deductions from the rental income received, you have a zero result. They balance each other. This means that there is no longer a shortfall that will give you any tax deductions – however, due to the fact that you do not have to physically outlay any money for the Non-cash deductions, you will actually be receiving a positive cash flow. On paper the income and expenses balance, but when you deduct the actual cash expenses from the income, there is still a surplus, which comes to you as a tax-free income.

Positive Gearing - Where the rental income exceeds the total of all cash and Non-cash expenses.

I like the strategy of buying two positively geared properties to every one negatively geared one - this way the overall result is neutral. You don't have to outlay any money to sustain the properties, and have the advantage of diversification, as they are normally sourced from totally different sectors of the market.

 

[new class]

Reply: 1.1.1
From: Tom Cleary


Rob
Probably a better approach is to use a cash flow approach. Subtract your cash expenses from your cash income.If you have some cash left after this exercise then you are positively geared if not negatively geared. I think it was Charles dickens who said something like "income - One pound, expenditure nineteen and sixpence, result happiness, income one pound expenditure one guinea result misery".
What muddies the water is the income tax code which allows expenses,for which no monies have been outlaid eg depreciation, capital allowance etc.
So you might be positively geared under an accounting reckoning i e more money coming into your pocked than going out, but be negatively geared under the tax regime more expenses than income, for which you make a paper loss and claim against other positive flow incomes.
Then you would need to work out your return on investment, but that's another story.
Regards
Tom

 

[paulzag]

Reply: 1.1.1.1
From: Paul Zagoridis


My positive cashflow properties pay me every month. That is my simple definition.

I use pre-tax results when working out returns. As I am self-employed it makes more sense.

Non-cash deductions are dangerous for newbies because depreciation deductions come off their cost base. So if the property is every sold (for any reason), depreciation can give rise to unexpected capital gain and CGT.

I take depreciation allowances, but I keep my own running balances, so I know what I'm up for when I sell.

Paul Zag
Dreamspinner

 

[WebBoard]

Reply: 1.1.1.1.1
From: Rob Millington


Thanks all for your replies, my main aim behind the question was to confirm that there were people making real cash out of IPs. Your replies have done just that.

Thanks again, Rob.M