Hi all,
First timer here. Just finished reading Steves 0 to 130 properties and am impressed. I currently own a unit which caters for students in Carlton Vic. and is negatively geared. My wife and I purchased this last October and it has made a $45k increase in value in that period. But….as you no doubt have worked out this is of a strategy which wont really pay any dividends until its sold, which we originally planned would be a few years down the track while looking to buy an additional property or two along the way. Of course, this is keeping me at work. What I want to know is….What do I do about this situation…I want to get into a positive cash flow situation and leave my job. I want to take the first step but I'm not too sure which way to go.
Regards.
It will pay dividends in the way of leveraging you into more property. You haven't mentioned if you own your ppor or not? I think this would be an issue because if you dont own your ppor and have a negatively geared investment, this means you will take much longer to pay off your ppor, which has no claimability, as your money is having to prop up your negative investment.
However it sounds as though your investment has had good growth in a short period of time. So surely you can sit down do some calculations and see how long (with increased rents) before it will become neutral or cash flow for you. Your $45k is worth more to you in the way of equity and leveraging you into more property than if you sold it, paid heaps in capital gain and came away with a few thousand in your pocket.
We learn along the way, I have similar investment hiccups but my advice would be to do some maths. If it is costing you too much and adding years of work onto your life then selling may be the option, however if rents increase and cashflow isn't too far away it may be wise to hang out for a while.
Thanks for replying cocobean. What does ppor mean? I'm guessing it means my own dwelling? We still owe about 80 k on a house worth around 300k. So we have equity in that as well. Our loan for the Carlton property isnt connected to our own home. All this was set up by CW Financial. They arre very big on the negative gearing side of things.
If we use this equity to get into an addtional positive cash flow property, how might this affect our negatively geared property. This is all very confusing.
Hi Bergy, ppor = principal place of residence as you've guessed. You have good equity in that. An additional cash flow +ve property won't really affect your negatively geared property.
Your negatively geared property may drop you down to a lower tax bracket, so when you're working out your net cash flow from your next property you have to use your reduced income after the neg gearing effect. It's not logical to consider the effect the other way around, because the neg gearing IP came first.
If your next IP is only cash flow +ve after tax, ie relying on depreciations & other non cash deductions to make it positive, then the negatively geared property may make this just a bit harder if it's pushed you down a tax bracket.
It's going to be a lot more difficult if you're neg geared now with a wage, and you want to stop working; your neg geared IP will be even more negative of course, and maybe your cf+ve one will become negative as well.
If you're talking about a positively geared property which makes you pay more tax, not less, (ie it's cf+ve before tax) then the less wage the better for that IP. You'll need quite a few of those before you can give up your wage, or just wait 20 years or so with a lot of initially neg geared ones that eventually become +ve. Either way it'll take a fair bit of time to really support you in retirement if you're just a passive buy & hold investor like me.
cheers, S/CHey SC cheers for that. Thats what I was concerned about…how my negatively geared property may effect on that is positive. You have helped clear things up quite a bit. I know I want to buy as many properties as I can as soon as I can. I may not gey 130 in 3.5 yrs but I want to have a huge crack at it anyway. No way I am going to work another 20 years for someone else.
B, it's great that you've now created a determined goal; I think that's the first big step. I finally saw the light 11 years ago. I started with 4 negatively geared IPs that are now just about neutral after tax. My rent has gone from about 155pw to 280pw on two houses, and from 200/w to 300/w on two units. Most of the depreciation has gone now, just the building at 2.5% for another 29 years is available. I've also got a CP (commercial property) that pays about 40k pa net before tax. I've just bought another IP 50:50 with one of my children, which is just cf neutral after tax with a fair bit of depreciation (being brand new), but only at the current interest rate I'm paying of 5.11%.
As you can see it's barely enough to retire on, and it will all evapourate if the interest rate goes up by about 3%. What I'm trying to show is that it can be a long slow process, but it eventually shows results. You just have to start early enough in life.
I do have a fair bit of equity now however, so if push came to shove, I could retire a fair bit of debt by selling one or two IPs. I'm loath to do that because of the CGT and selling costs would take a big chunk of my working capital.
The thing is that it all sits pretty much in the background except for the occasional feverish activity doing my own repairs between tenants, or doing my own landscaping (26 tonnes of stuff we moved!!!) on the last one, and I'm free to do my day job which I've enjoyed doing. It's a real bummer if you don't enjoy your work. If that's the case then maybe you need to get much more proactive in your property endeavours, eg start developing or renovating.
Best wishes, S/C.
PS B, here's a good book by Stuart Wemyss that I've just read. It gives a good comparison of the various strategies of pos or neg gearing and development, plus defining goals, retirement strategy etc.
http://www.prosolution.com.au/books/ppuzzle.htm
The only thing I'm a bit dubious about in his book is the expectation of always getting 7 to 10% capital growth. I've averaged about 7 to 8 % over the last decade, but that can't go on forever; it's mathematically impossible. If it were possible then a house that goes up 7% for 100 years while inflation averages 3% over the same period would cost 45 times what it does today. If I could get 10% growth over that period, then it would cost 717 times what it does today (all in today's dollars that is).
S/CThanks SC. I have just ordered the book online.
Bergy, Have you investigated getting a variation on your tax. if you can show that you have a certain loss over the financial year you may be able to claim a variation and pay less tax each pay period. this would free up some money to put towards your PPOR. It would mean that you don't get a lump sum tax return at the end of the financial year, however you may have more money in your pocket week to week.
sonya
Hi S. Funny you mentioned that. That is something we are currently working out with our accountant. Thanks
Bergy, congrats on your Carlton unit. My brother bought one a few years ago and it has also appreciate very well. It has also never experienced down time as it is so close to the university.
My general advice is don’t think about selling Carlton at all. Selling has all the CGT and transaction costs associated with it and besides, you have only held it for less than a year! Carlton would do the job to offset as much of your income as possible. As long as you park any spare cash in an offset account, I dont see the big hurry in turning Carlton positive.
In the meantime, look for new apartments which offers a very low deposit for exchange and I know Melbourne has heaps. In my own experience, I managed to buy 3 properties in the last 6 months due to a combination of low interest rates, a $10k deposit for a brand new unit by the beach, lots of very detailed research and some good fortune and strategies at an auction. With current interest rates, it is not all that hard finding a positively geared property to complement your negative Carlton since you need one to offset your income anyway. I have been looking in Melbourne as well coz Sydney is relatively more expensive but my recent buys happen to be in Sydney because 2 of them are positively geared with very favourable exchange conditions.
Hope this helps!
Thanks for those insights aws! I have been looking at Vic, NSW and QLD for positively geared properties. There doesnt 'seem' to be too many in SA atm. You said that Melbourne has hepas of new apartments for a low deposit. Do these pass the '11 second rule'? I guess I'm asking coz I want to know if I will start earning cah from day one.
Regards,
ShaneShane,
I’m saying that for certain developments, don’t just take the developer’s price and exchange terms as they are but negotiate hard with them. I just posted a thread on how I drove a really hard bargain for 4 weeks with AV Jennings and they eventually gave in which resulted in huge savings. I came across a few projects in Brunswick and Coburg in Melbourne which I believe there is scope to negotiate. Only problem was I couldnt find a unit which I thought would be an all round great buy, ie layout plan, location, strata levies, public transport, price etc.
Ironically, I found 2 brand new ones with my requirements back here in Sydney after a wild goose chase in Melbourne.
The ones I bought was cash positive with 20% equity but there are those which are also positive with only 10% deposit.
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