Steve, Jan & Margaret

Whilst ‘surfing’ found this article and as it’s relevant to Steve and the forum.. i’m posting it for all..

NOT SO TAXING

A positively geared property has a lot going for it. Peter Weekes explains.

Forget the myth; statistics don’t lie. Most people lose money on property. The last national snapshot of residential property investors by the Australian Bureau of Statistics, in 1997, found that less than 30 per cent made a profit in 1995-96; 11 per cent broke even; and 36 per cent made a loss. The rest simply didn’t know.

Steve McKnight, author of From 0 to 130 Properties in 3.5 Years, says most investors are taking a punt on price growth putting them well into the black when they sell their investment property.
Still, in the last 22 years Melbourne property prices have only increased substantially in eight of those years – five of which were when interest rates were at historic lows. In the remaining 14 years prices either went sidewards or edged up only slightly, McKnight says, adding that the situation is similar in most other capital cities.

“Sure, some people have made money, but they have made it over the last five years,” he says. “But most property investors are in there for the long haul.”

McKnight and fellow author Jan Somers, whose books include More Wealth from Residential Property, say the reason most people fail to make money in property is their misdirected obsession with tax.
“I can’t understand why anyone would go into negative gearing as a long-term strategy,” McKnight says. “People do it under the guise of saving tax, but it actually keeps them poor.”

A property is negatively geared when the cost of holding it, including interest on the loan, exceeds rental income. That is, it produces a running loss when all income and costs are taken into account.
The significance of this loss is that it is tax deductible against any other assessable income you may have. This has the effect or reducing your tax bill, especially if you are on a higher marginal rate.
“Negative gearing is about borrowing money to lose money, while positive gearing is about borrowing money to make money,” says McKnight.

Positive gearing’s bedfellow, positive cash flow investing, has been around since the first tenant received his keys. It has largely been overlooked, says Somers, because third parties, like property seminar spruikers, can’t make money out of it.

The concept itself is relatively simple. Positive cash flow simply means that you have more money coming in from a rental property than is going out. That is, the rent covers all costs, including the mortgage, insurance, interest, etc.

Also, there will usually be a large number of items that you can claim depreciation on, and as this is ideally already covered by the rent, the tax break becomes tax back in your pocket.
Whether a particular property generates a positive cash flow depends on many things: rental income, the interest rate, allowable deductions and your own marginal tax rate.

Both McKnight and Somers concede finding that property may be difficult in a booming market, but they do exist.
“It’s a matter of matching the right property, with the right person, with the right strategy,” says McKnight.

Most of these “right” properties are found in outer suburban and rural areas. Most investors, she says, tend to look for properties where prices are already strong, such as inner-city apartments. “However, that means the rent, in proportion to the property’s value, is very low.
“In that case you are either negatively geared or have a negative cash flow. You [must] keep paying money in the expectation that in 20 years the money that you make will [make up for it].”

Somers says young people making a start in adult life and those nearing retirement should consider opting for positive cash flow rather than negative gearing.
“It depends on where they are in their life cycle as to which is better,” she says.
“Young people starting out should go for cheaper high-yielding low-growth properties. As people move into higher incomes they could look to higher-growth low-yielding property, as they have the income to support it. As they get closer to retirement, the income from their jobs is [about] to stop, so they should switch to higher-yielding properties that will give them the income for retirement.”

Author Margaret Lomas says the secret of investing wisely in property does not lie in negative gearing, as many Australians believe. It lies in being able to approach the investment process with a business mind, being astute and relentless, and calculating the bottom line costs and net cash positions.

And remember, just because it is bricks and mortar does not make it a moneyspinner. Time cannot always make up for a poor investment decision.

How to recognise a positive cashflow property

In her book How to Make Your Money Last as Long as You Do, Margaret Lomas says positively geared properties are easy to spot. Simply estimate the potential income (remembering it may be vacant for at least a couple of weeks a year), then add up all the costs, including potential repairs. When you subtract the expenses from the income and the balance is positive, reduce it by your top marginal tax rate.

The remaining figure will be the amount of positive cash flow.

However, positive cash flow where the property has an on-paper loss, and so extra tax is not payable, can be harder to calculate, Lomas says. She provides the following formula in her book:

1. Add your current taxable income to your rental return to get your new gross income.
2. New gross income less expenses and depreciation equals your new taxable income.
3. Calculate the tax on the new taxable income.
4. New gross income less expenses less tax on new taxable income equals your new net income.

Better than managed funds

Barbara Smith knows all about tax. She is, after all, the technical director of Taxpayers Australia. But 33 years ago she was a young, lowly paid bookkeeper wanting to supplement her weekly income.

The solution came in the form of a cash-flow-positive property. From very tentative beginnings as an investor with a property worth $5800 in 1970, Smith now has a handful of apartments, which she is still adding to.

“I was a much more conservative investor in those days,” she says. “I was on a fairly low wage, working as a bookkeeper, and it seemed to make sense to me to try and get more from investments.

“I was looking for positive cash flow property. There was no way in those days that I would have ever invested using negative gearing. Even today I would be quite loathe to use it unless I could see some positive cash flow in a short time.”

Her aversion to negative gearing is simple: all you are doing is relying on capital gain sometime in the future, and if you don’t get that gain you are paying money to the taxman or the bank. Of her portfolio of properties, all have positive cash flow except for one, which breaks even.
“I own three residential properties in the CBD. I looked for small properties at the bottom of the market that would return high rent. I’ve found those are the best investments I’ve got,” Smith says. “I didn’t look for expensive properties.

“The rent has crept up over the years, and the properties have performed much better than a managed fund investment I made at the same time.”

One studio apartment, which cost her $85,000 in 1994, now returns $215 a week. She says these properties, bought off-the-plan, also bring other rewards for “a woman who doesn’t want to carry out much maintenance

The benefits of + gearing.. REDWING

http://www.edestiny.com.au/ ( margaret Lomas’s group)- just located this..A + Geared business franchise, have a look , let me know what you think !

REDWING