Good Morning,
Could you please explain what constitutes a positive geared investment property.Does it mean that if you purchase a property at $320,000 and you borrow $250,000 at 7% = monthly repayment of $1664 and the rental income is $1800 pm -does that mean it is positive geared.
Alternatively if a property is purchased for $320,000 and the rental income is $400.00 pw week does that mean it is positively geared?
Thank you
In a nutshell a property will be positively geared if there is excess income after all the related expenses (insurance, maintenance, mortgage payments etc) and you dont have to put in any additional funds.
In your first scenario you have $136 left after mortgage payments each month. If this covers your expenses such as insurance, rates and maintenance you will have a positive cashflow from the property.
The same philosophy applies to your second scenario.
Hope that helps
Cheers
Rob
[cap]Hi,
In recent times there seems to be a point of distinction between positively geared and positive cashflow (especially after Margaret Lomas’ books)
Positively Geared
A positive cashflow outcome after the tax effect of non-cash depreciation tax deductions has been factored in.
That is, a pre-tax negative cashflow situation that is turned into an after-tax positive cashflow outcome because the tax benefit of the depreciation tips it over the line.
Positive Cashflow
Simply more cash received than cash paid – ignoring the tax impact of depreciation and not distinguishing cah inflow and traditional revenue, or cash payments and accounting expenses.
For example, in my case, I treat my entire P&I loan repayment as a cash outflow (under positive cashflow), where as for acocunting purposes I’d only include the interest component.
Having said that, I’m not sure how positive gearers treat the principal part of a loan repayment since most of the models I have since promote interest-only loans.
Sorry, it seems to have turned out to be a complex (and perhaps academic) way to explain the difference, but it’s kind of needed in the interests of accuracy.
Regards,
Steve McKnight
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