Negative Gearing vs Positive Gearing – with supported analysis

ok, my first post, hello to all , thank you for having me i jumped on today for the first time and a ran a couple of searches on cash flow vs capital growth (ie. positive gearing vs negative gearing), the endless debate..This is an area that interests me greatly. After reading through many threads on the topic, there are people who put down some very valid arguments, from both sides of the coin.There are also many posters that ask for supporting analysis or empirical evidence, to substantiate either side of the debate. I struggled to find any in these forums. Correct me if I am mistaken.Before posting , i took it upon myself to run a search on the net for any worksheets that have already been created on this piece of analysis, fortunately for me there was (no point re-inventing the wheel ey)its fairly basic stuff but at least it provides food for thoughtI can appreciate that the argument for pos or neg gearing comes down to personal preference, ie. what is your risk tolerence / profile, do you prefer two in the hand or one in the bush, are you young, near retirement, do you prefer additonal ordinary income or are you after capital growth for equity leveraging purposes, do you earn 300K p.a hence getting a bigger tax break or do you earn 30K p.a and pay little in tax so neg gearing becomes less of a priority to you???these considerations are all very valid. But if we put them all aside and just focus on the quantitative aspects – just the raw numbers as they never lie – I would be intersted to know what the results are. ie. all things being equal, (ie. peoples risk profile, people salaries and hence tax rate, peoples' time they had to invest), what would the results be???I have heard many of this forum argue "i will take positive gearing any day over negative gearing because why would someone want to make a loss??" but there is much more to consider – as many of you already know.- if you are inclined to be positvely geared because of falling asset prices, whats to say that purchasing a pos geared property wont fall at a greater rate than a negatively geared property? – What happens if banks mark to market every year instead of retining book value?? And as a result, your pos geared asset is now 50K lower in value than the neg geared one? and the net difference in rent up until this point has been about 10K, so a 40K difference, which one is better??- what about if we are in an increasing asset market and you have bought a positively geared place in Bendigo that has a forcasted compounded capital growth rate of 3% p.a and pos geared, but had you bought that victorian style aprtment on the outskirts of Melbourne, you would be enjoying a 8% p.a compunded capital growth rate, all else being equal.Putting aside the qualittative variables (ie. risk profile, stage of life you are at, old, young, have family, or just personal choice), lets focus on the quantitative, as mentioned already. The point of this exercise is that we need to consider all the quantitative variables, some of which have just been mentioned.I am perononally of the view that neg geariing is much more powerful than positive, this is simply my view, but like everything , i am alway open to learning if you can support it with some evidence to the contrary. Even some general information that I can further explore to form a more informed view (admittedly I do not know as about a pos geared RE strategy as I do about a neg gared one)I also want to know what figures people have in the heads when they are making statements like "pos geared is far superior than neg gearing"  ie. are you referring to say a rental yield of 6% and capital growth of 3% on a pos geared place compared to negative gearing with a rental yeild of only 2% and capital growth rate of 5%??).  Are people also looking at the cost of capital or maybe the return on invesment with those positively geared surplus funds invested elsewhere or back into the offset account / line of credit?? What general assumptions are people making when deciding upon say a positive geared strategy. Have you backtested you stratgey over different areas, oevr the last 30 years? Where are you gaining you level of confidence from? What makes you think your strategy has an edge over the other??i would be very interested in hearing what variables people would use to work out which startegy is better, in their opinion this is a very important discussion, because it could make a difference between having say $10m in equity after a 30 year period or a $3m in equity after the same time period, for example. So this is good analysis for people startign out and assessing thier options in RE.I have attched a spreadsheet , being pos geared VS neg geared, i would be interested to hear what variables we should be using to make a call on which method is superior (quantitatively) that will give one confidence in which one to chose.damn.!!after all that , i just realised that i cant attach this file..!anyway, all my points still stand, i will try and cut and paste from filehere goes :<font size=”2″>POSITIVELY GEARED</font><font size=”2″>  (Example 1)</font> <table border=”0″ cellspacing=”0″ cellpadding=”0″ width=”272″ height=”206″ style=”border-collapse: collapse”> <tbody><tr height=”17″ style=”height: 12.75pt”> <td width=”90″ height=”17″ style=”height: 12.75pt; width: 68pt”>House price</td> <td width=”90″ style=”width: 68pt”> </td> <td class=”xl64″ width=”90″ align=”right” style=”width: 68pt”>$250,000 </td> </tr> <tr height=”20″ style=”height: 15pt”> <td height=”20″ style=”height: 15pt”>Rent per week</td> <td>(6% yield)</td> <td class=”xl68″ align=”right”>$300</td> </tr> <tr height=”17″ style=”height: 12.75pt”> <td height=”17″ style=”height: 12.75pt”>Interest rate</td> <td> </td> <td class=”xl69″ align=”right”>5.80%</td> </tr> <tr height=”20″ style=”height: 15pt”> <td colspan=”2″ height=”20″ style=”height: 15pt”><font color=”#ff0000″>House appreciation (on CPI)</font></td> <td class=”xl67″ align=”right”><font color=”#ff0000″>3%</font></td> </tr> <tr height=”20″ style=”height: 15pt”> <td colspan=”2″ height=”20″ style=”height: 15pt”>Rent appreciation (on CPI)</td> <td class=”xl67″ align=”right”>2%</td> </tr> <tr height=”17″ style=”height: 12.75pt”> <td colspan=”2″ height=”17″ style=”height: 12.75pt”>Risk-free investing (on CPI)</td> <td class=”xl65″ align=”right”>2%</td> </tr> <tr height=”17″ style=”height: 12.75pt”> <td colspan=”2″ height=”17″ style=”height: 12.75pt”>Management fee</td> <td class=”xl65″ align=”right”>6%</td> </tr> <tr height=”17″ style=”height: 12.75pt”> <td height=”17″ style=”height: 12.75pt”>Repair costs</td> <td> </td> <td class=”xl65″ align=”right”>4%</td> </tr> <tr height=”17″ style=”height: 12.75pt”> <td colspan=”2″ height=”17″ style=”height: 12.75pt”># weeks vacany / yr</td> <td class=”xl66″ align=”right”>2</td> </tr> <tr height=”17″ style=”height: 12.75pt”> <td height=”17″ style=”height: 12.75pt”>Deposit</td> <td> </td> <td class=”xl64″ align=”right”>$20,000 </td> </tr> <tr height=”17″ style=”height: 12.75pt”> <td colspan=”2″ height=”17″ style=”height: 12.75pt”>Marg. Tax Rate</td> <td class=”xl65″ align=”right”>40%</td> </tr> <tr height=”17″ style=”height: 12.75pt”> <td height=”17″ style=”height: 12.75pt”> </td> <td> </td> <td class=”xl63″> </td> </tr> <tr height=”17″ style=”height: 12.75pt”> <td colspan=”2″ height=”17″ style=”height: 12.75pt”>IO Loan payments</td> <td class=”xl63″ align=”right”>$13,340 </td> </tr> </tbody></table><table border=”0″ cellspacing=”0″ cellpadding=”0″ width=”296″ height=”61″ style=”border-collapse: collapse”><tbody><tr height=”20″ style=”height: 15pt”> <td width=”90″ height=”20″ style=”height: 15pt; width: 68pt”> <table border=”0″ cellspacing=”0″ cellpadding=”0″ width=”180″ style=”border-collapse: collapse; width: 136pt”> <tbody><tr height=”20″ style=”height: 15pt”> <td width=”90″ height=”20″ style=”height: 15pt; width: 68pt”><font color=”#0000ff”>25yr return</font></td> <td class=”xl65″ width=”90″ align=”right” style=”width: 68pt”><font color=”#0000ff”>$244,662.64</font></td> </tr> <tr height=”20″ style=”height: 15pt”> <td class=”xl67″ height=”20″ style=”height: 15pt”><font color=”#0000ff”>ROI</font></td> <td class=”xl66″ align=”right”><font color=”#0000ff”>1223.31%</font></td> </tr> </tbody></table></td> <td class=”xl66″ width=”90″ align=”right” style=”width: 68pt”> </td> <td class=”xl65″ width=”90″ style=”width: 68pt”> </td> <td class=”xl67″ width=”90″ align=”right” style=”width: 68pt”> </td> </tr></tbody></table><font size=”2″>NEGATIVELY GEARED</font><font size=”2″> (Example 1)</font> <table border=”0″ cellspacing=”0″ cellpadding=”0″ width=”270″ style=”border-collapse: collapse; width: 204pt”> <tbody><tr height=”17″ style=”height: 12.75pt”> <td width=”90″ height=”17″ style=”height: 12.75pt; width: 68pt”>House price</td> <td width=”90″ style=”width: 68pt”> </td> <td class=”xl66″ width=”90″ align=”right” style=”width: 68pt”>$250,000 </td> </tr> <tr height=”20″ style=”height: 15pt”> <td height=”20″ style=”height: 15pt”>Rent per week</td> <td>(3,5% yield)</td> <td class=”xl70″ align=”right”>$175 </td> </tr> <tr height=”17″ style=”height: 12.75pt”> <td height=”17″ style=”height: 12.75pt”>Interest rate</td> <td> </td> <td class=”xl71″ align=”right”>5.80%</td> </tr> <tr height=”20″ style=”height: 15pt”> <td colspan=”2″ height=”20″ style=”height: 15pt”><font color=”#ff3300″>House appreciation (on CPI)</font></td> <td class=”xl69″ align=”right”><font color=”#ff3300″>6%</font></td> </tr> <tr height=”20″ style=”height: 15pt”> <td colspan=”2″ height=”20″ style=”height: 15pt”>Rent appreciation (on CPI)</td> <td class=”xl69″ align=”right”>2%</td> </tr> <tr height=”17″ style=”height: 12.75pt”> <td colspan=”2″ height=”17″ style=”height: 12.75pt”>Risk-free investing (on CPI)</td> <td class=”xl67″ align=”right”>2%</td> </tr> <tr height=”17″ style=”height: 12.75pt”> <td colspan=”2″ height=”17″ style=”height: 12.75pt”>Management fee</td> <td class=”xl67″ align=”right”>6%</td> </tr> <tr height=”17″ style=”height: 12.75pt”> <td height=”17″ style=”height: 12.75pt”>Repair costs</td> <td> </td> <td class=”xl67″ align=”right”>4%</td> </tr> <tr height=”17″ style=”height: 12.75pt”> <td colspan=”2″ height=”17″ style=”height: 12.75pt”># weeks vacany / yr</td> <td class=”xl68″ align=”right”>2</td> </tr> <tr height=”17″ style=”height: 12.75pt”> <td height=”17″ style=”height: 12.75pt”>Deposit</td> <td> </td> <td class=”xl66″ align=”right”>$20,000 </td> </tr> <tr height=”17″ style=”height: 12.75pt”> <td colspan=”2″ height=”17″ style=”height: 12.75pt”>Marg. Tax Rate</td> <td class=”xl67″ align=”right”>40%</td> </tr> <tr height=”17″ style=”height: 12.75pt”> <td height=”17″ style=”height: 12.75pt”> </td> <td> </td> <td class=”xl65″> </td> </tr> <tr height=”17″ style=”height: 12.75pt”> <td colspan=”2″ height=”17″ style=”height: 12.75pt”>IO Loan payments</td> <td class=”xl65″ align=”right”>$13,340 </td> </tr> </tbody></table> <table border=”0″ cellspacing=”0″ cellpadding=”0″ width=”180″ style=”border-collapse: collapse; width: 136pt”> <tbody><tr height=”20″ style=”height: 15pt”> <td width=”90″ height=”20″ style=”height: 15pt; width: 68pt”><font color=”#000099″>25yr return</font></td> <td class=”xl65″ width=”90″ align=”right” style=”width: 68pt”><font color=”#000099″>$314,742.96</font></td> </tr> <tr height=”20″ style=”height: 15pt”> <td class=”xl67″ height=”20″ style=”height: 15pt”><font color=”#000099″>ROI</font></td> <td class=”xl66″ align=”right”><font color=”#000099″>1573.71%</font></td> </tr> </tbody></table>In Example 1 (above), negative gearing wins,But if I were to change just the capital growth rates and leave eveything else the same, then the results are vastly different. In Example 2, pos geared wins hands down as a result of <u>increasing</u> its capital growth rate by 1% p.a and <u>decreasing</u> the negitively geared property's capital growth rate by 1%<font size=”2″>POSITIVELY GEARED</font><font size=”2″>  (Example 2)</font><table border=”0″ cellspacing=”0″ cellpadding=”0″ width=”270″ style=”border-collapse: collapse; width: 204pt”><tbody><tr height=”20″ style=”height: 15pt”> <td colspan=”2″ width=”180″ height=”20″ style=”height: 15pt; width: 136pt”><font color=”#ff0000″>House appreciation (on CPI)</font></td> <td class=”xl65″ width=”90″ align=”right” style=”width: 68pt”><font color=”#ff0000″>4%</font></td> </tr></tbody></table><table border=”0″ cellspacing=”0″ cellpadding=”0″ width=”180″ style=”border-collapse: collapse; width: 136pt”> <tbody><tr height=”20″ style=”height: 15pt”> <td width=”90″ height=”20″ style=”height: 15pt; width: 68pt”><font color=”#3300ff”>25yr return</font></td> <td class=”xl65″ width=”90″ align=”right” style=”width: 68pt”><font color=”#3300ff”>$310,976.39</font></td> </tr> <tr height=”20″ style=”height: 15pt”> <td class=”xl67″ height=”20″ style=”height: 15pt”><font color=”#3300ff”>ROI</font></td> <td class=”xl66″ align=”right”><font color=”#3300ff”>1554.88%</font></td> </tr> </tbody></table><font size=”2″>NEGATIVELY GEARED</font><font size=”2″> (Example 2)</font><table border=”0″ cellspacing=”0″ cellpadding=”0″ width=”270″ style=”border-collapse: collapse; width: 204pt”><tbody><tr height=”20″ style=”height: 15pt”> <td colspan=”2″ width=”180″ height=”20″ style=”height: 15pt; width: 136pt”><font color=”#ff0000″>House appreciation (on CPI)</font></td> <td class=”xl65″ width=”90″ align=”right” style=”width: 68pt”><font color=”#ff0000″>5%</font></td> </tr></tbody></table> <table border=”0″ cellspacing=”0″ cellpadding=”0″ width=”180″ style=”border-collapse: collapse; width: 136pt”> <tbody><tr height=”20″ style=”height: 15pt”> <td width=”90″ height=”20″ style=”height: 15pt; width: 68pt”><font color=”#3300ff”>25yr return</font></td> <td class=”xl65″ width=”90″ align=”right” style=”width: 68pt”><font color=”#3300ff”>$211,763.62</font></td> </tr> <tr height=”20″ style=”height: 15pt”> <td class=”xl67″ height=”20″ style=”height: 15pt”><font color=”#3300ff”>ROI</font></td> <td class=”xl66″ align=”right”><font color=”#3300ff”>1058.82%</font></td> </tr> </tbody></table>So the point is, its all about which variables you are assuming. So what does everyone do? Ok, im heading to bed now thanks for reading