Using offset account with IP a good strategy?

[DanielG]

Hi All,

Real quick. In this environment of falling prices (could be years until capital gains return), is negative gearing still a valid strategy?

Ive just refinanced into an offset loan, I have moved 100K into that and now my properties are cashflow positive to the tune of about $80 a month.

My financial advisor says this is a dumb strategy cause I cant use negative gearing, I fired back telling his negative gearing is only valid if capital gains meet or exceed the amount you are putting into the loan every year (after negative gearing is calculated). He said that positive cashflow is just a way to give more tax to the government, where as I stated negative gearing with flat or falling prices is giving away money to the banks.

The way I see it, in the particular environment, N.G doesn't make sense. Pos. Cashlow means I can hold onto the property for as long as it takes for the next cycle to come around, and then I can use the money in the offset to purchase new investments as the opportunities arise, go back into neg. gearing when its feasible again.

Your thoughts or is my adviser correct?

 

[Aaron_C]

Negative gearing is a valid strategy. However, you are right in saying that it works best when there is a period of high capital growth which would outstrip any losses on the portfolio. But I think that at this stage in the cycle, it is good to be cashed up looking for opportunities. If this means paying a little bit more tax to the government, so be it. It's better to be prepared than overextended.

 

[DanielG]

Negative gearing is a valid strategy. However, you are right in saying that it works best when there is a period of high capital growth which would outstrip any losses on the portfolio. But I think that at this stage in the cycle, it is good to be cashed up looking for opportunities. If this means paying a little bit more tax to the government, so be it. It's better to be prepared than overextended.

Thanks Aaron. I agree. I wonder what most investors here think.

 

[Rolf Latham]

Hi All,

Real quick. In this environment of falling prices (could be years until capital gains return), is negative gearing still a valid strategy?

Ive just refinanced into an offset loan, I have moved 100K into that and now my properties are cashflow positive to the tune of about $80 a month.

My financial advisor says this is a dumb strategy cause I cant use negative gearing, I fired back telling his negative gearing is only valid if capital gains meet or exceed the amount you are putting into the loan every year (after negative gearing is calculated). He said that positive cashflow is just a way to give more tax to the government, where as I stated negative gearing with flat or falling prices is giving away money to the banks.

The way I see it, in the particular environment, N.G doesn't make sense. Pos. Cashlow means I can hold onto the property for as long as it takes for the next cycle to come around, and then I can use the money in the offset to purchase new investments as the opportunities arise, go back into neg. gearing when its feasible again.

Your thoughts or is my adviser correct?

My only question is

1. Do u have any non investment debt ( ie PPOR or car loans)



My primary comment is that your financial guy is maybe not telling you the whole truth...........I suspect there is a product offering behind the 100 k, ie invest it into something. thats not good or bad, it just is.

ta
rolf

 

[marg4000]

Even on the highest tax bracket you "get back" only half of your losses, so good capital growth (over time) is essential otherwise you are going backwards.

Tax benefits should only ever be the icing on the cake. Investments simply to save tax are often not in your best interests overall.
Marg

 

[DanielG]

Hi Rolf,

No I have no other loans. I will never buy my own house (as I see that as bad debt). I am renting. Cars was paid off 10 year ago.

 

[DanielG]

Even on the highest tax bracket you "get back" only half of your losses, so good capital growth (over time) is essential otherwise you are going backwards.

Tax benefits should only ever be the icing on the cake. Investments simply to save tax are often not in your best interests overall.
Marg

Thanks Marg that is what I believe. When I told friends who are investors that I was doing this, they all said I was nuts also cause I would lose negative gearing. When I told them you lose 60 cents of every dollar after negative gearing, the point was that YOU MUST PAY 60 CENTS in order to keep the strategy viable. They didn't get it. I really believe negative gearing is really misunderstood by the common RE investor.

In a growth cycle, sure, excellent strategy. Otherwise, I don't see the point.

 

[Rolf Latham]

Hi Rolf,

No I have no other loans. I will never buy my own house (as I see that as bad debt). I am renting. Cars was paid off 10 year ago.

cool then, nothing wrong with paying a wee bit more tax

too many are focussed on minimize rather than focus of growth and/or income

ta

rolf

 

[DanielG]

cool then, nothing wrong with paying a wee bit more tax

too many are focussed on minimize rather than focus of growth and/or income

ta

rolf

thanks. Just needed validation.

 

[BMan]

i think you need to be charging your financial adviser
took me 3 Mortgage brokers before i found a good one
been to 2 financial advisers and neither had a clue about what they were doing, just puppets to the group they are in

 

[Peter_Tersteeg]

If your financial advisor has a strategy you're comfortable with for your cash that will outperform the gearing costs, then he may have a point. If your not comfortable with the strategy, then putting your cash into an offset account is probably the most effective use of it.

 

[Rolf Latham]

Hi Rolf,

No I have no other loans. I will never buy my own house (as I see that as bad debt). I am renting. .

Never ? Even with cash ?


ta
rolf

 

[Terryw]

Ive just refinanced into an offset loan, I have moved 100K into that

You have me worried, this $100k wasn't borrowed money was it?

 

[Rolf Latham]

You have me worried, this $100k wasn't borrowed money was it?

id hope not, since Daniels Net cash flow would not have changed.

ta
rolf

 

[redwing]

You have me worried, this $100k wasn't borrowed money was it?

i.e. Line Of Credit

 

[belleran]

Would it be best to have enough in the offset to make the IP neutrally geared and make the balance of you cash work for you in some other investment??

 

[Terryw]

Would it be best to have enough in the offset to make the IP neutrally geared and make the balance of you cash work for you in some other investment??

If you kept funds in an offset account then you would basically be getting the same rate of return as the interest rate on the home loan. So if you think you could get a higher return elsewhere it may be better to move your money to that investment.

 

[luckyone]

I'd much rather my properties were positive cashflow rather than negatively geared. One is close to being (it is after depreciation's taken into account), the other's not close at the moment but I imagine it will be in about 5 years. I've only bought negatively geared ones because I decided that I wanted to buy properties close to home so that I could keep an eye on them. I can't say that I've really kept an eye on them because I'm not allowed to drive past them too often (and can't see much anyway), but it is nice to know they're not too far away if I ever need to go there for any reason.

Your strategy seems good to me.

 

[DanielG]

You have me worried, this $100k wasn't borrowed money was it?

No guys...100K saving

 

[Terryw]

No guys...100K saving

Excellent!