i know some of you think negative gearing is a dirty word….but thoughts of that aside, is being in a negative geared position, something that generally reduces over time? Is there a reasonable time period to expect this to turn into a positive position each year?
Hi Tiger,
As your rental income increases there will come a point in time when the property is no longer negatively geared as rental income exceeds expenses.
The trouble is this is not something you can set your clock by as there are so many factors that come into play. I have heard some people suggest after about X yrs the property will be positively geared. What happens if your rental increases are slower than normal? What happens if interest ratesincraese by 2%? What if strata fees, rates etc all increase above inflation rate? And so on. Clearly there is no definate timeline.
If you are factoring tax deductions into the equation and trying to determine if the property is cashflow positive this will be very much dependent upon your income level. As a strategy (or technique) negative gearing is more suited to higher income earners as the percentage rebatable by the ATO is higher on a higher income becuase of the way our tax system is set up.
The other thing you need to be aware of is that as your negatively geared portfolio grows your gross taxable income falls. This means that while negative gearing with a high gross income was beneficial (if the property grows in value) it becomes less beneficial on a lower gross taxable income.
as an aside you also need to consider the impact negative gearing has on your serviceability calculations for future financing options.
Hope this helps
Good points Derek.
Not everyone is against negative gearing. It sometimes serves a purpose. The thing people are against is buying a negatively geared property JUST to get the tax benefits.
Some people like to buy in certain areas that they believe will have higher growth. These areas can have low yields so they buy in the "hope" that they will gain with CG. It's not my strategy but others swear by it.
As Derek said- there's no magic number. If it suits your portfolio go for it. Too much negative CF will limit your ability to grow your portfolio (until the CG kicks in). Some buy a mixture of CF+ and CF- to ensure serviceability.
People forget that you are still getting tax benefits with a positive geared property. The idea with any property investment strategy is to aim for a neutrally geared portfolio.
Negative gearing effects your borrowing capacity and lifestyle. There is no reason you can't own 20 IP's and have them be neutrally geared. It's all in the numbers. Too many people look for property first and look at the numbers last. That's not how you should buy property.
It really has to be an individual thing tailored to suit YOUR lifestyle and YOUR numbers so it's not negatively geared.
<moderator: delete advertising>Very enlightening comments. I agree that negative gearing should eventually turn neutral or positive. The more threads I read, the more I am leaning toward neutral cash flow properties but wherre do I find them (sorry Derek not keen on Karratha)?
Hi Laury
Really depends on your own situation as to what location would or what location might not be suitable to your numbers.
It's a tailored process, so not really a one size fits all scenario.
It is a some what fine balancing act that needs to be looked at in more depth, but with most locations we have seen, it's pretty easy to see a neutral cash flow.PISTORE wrote:The idea with any property investment strategy is to aim for a neutrally geared portfolio.Really??? What's the point in that? OK if you're working a job I guess but it certainly wouldn't be anyones aim.
My investment strategy is to be POSITIVELY geared. I want to be making money. The more positive my portfolio is the more money in my pocket.
My assumption of neutral gearing is that after you have crunched all the numbers including depreciation etc Mr Taxman chooses not to take a cent off you but in reallity you have actually put a couple of dollars in your pocket. Please correct me if I am wrong!
Saying that the aim of having a negatively geared portfolio is ridculous in my opinion, the same as saying the goal is to have a positively geared portfolio.
I think the aim would be to have a property portfolio that acts to meet your individual goals.
Some people would be happy with a negatively geared portfolio with plenty of upside for growth in the short to medium term, while others would be happy with a positively geared portfolio that nets $2k per month. It depends on who you are and what your goals are.
Personally, I would prefer a nuetrally geared $10m residential portfolio with properties located in potentially high growth urban areas, that a $1.5m portfolio of properties in marginal rural areas that brings in a thousand dollars a month. But others might prefer it the other way around.
Cheers,
LukeThis topic interests me… As before going onto my second IP and the way forward I am trying to get my head around where to go with regard to my portfolio.. But I think the majority agree it depends on your circumstances.. As you get closer to retirement whatever age that might be you want your portfolio to be capable to be positive, assuming you sell 2 – 3 property that had CG to pay off other investments..
Still trying to determine the way forward on the above for myself.. Don’t want to get IP 3 and have to stop as not enough equity to buy IP 4
Sam
Catalyst wrote:PISTORE wrote:The idea with any property investment strategy is to aim for a neutrally geared portfolio.Really??? What's the point in that? OK if you're working a job I guess but it certainly wouldn't be anyones aim.
My investment strategy is to be POSITIVELY geared. I want to be making money. The more positive my portfolio is the more money in my pocket.
It's all about balance. Positively geared portfolios are great until you start getting taxed for the privilege.
The way I see it is that if you become positive geared then go and buy another investment property to offset your positive gearedness (if that's even a word) this way your problem keeps compounding, which is a great problem to have. If you keep aiming at a neutral portfolio then Julia can't get her bit and you maximize your opportunity for growth.PISTORE wrote:Catalyst wrote:PISTORE wrote:The idea with any property investment strategy is to aim for a neutrally geared portfolio.Really??? What's the point in that? OK if you're working a job I guess but it certainly wouldn't be anyones aim.
My investment strategy is to be POSITIVELY geared. I want to be making money. The more positive my portfolio is the more money in my pocket.
It's all about balance. Positively geared portfolios are great until you start getting taxed for the privilege.
The way I see it is that if you become positive geared then go and buy another investment property to offset your positive gearedness (if that's even a word) this way your problem keeps compounding, which is a great problem to have. If you keep aiming at a neutral portfolio then Julia can't get her bit and you maximize your opportunity for growth.Why would you buy a property to save tax?
Cheers,
LukeLaury wrote:My assumption of neutral gearing is that after you have crunched all the numbers including depreciation etc Mr Taxman chooses not to take a cent off you but in reallity you have actually put a couple of dollars in your pocket. Please correct me if I am wrong!Essentially your right. It's about running the books at a balance. Remember, you don't make money from rent, you make money from growth. The rent is what enables you to cash flow the property long enough to make the growth.
EG: lets say you had 4 investment properties. 1 was Negatively geared and 3 were positively geared. If the numbers were done right, you could own all 4 of those properties 4 $0 out of your pocket every week.
After a while, your portfolio would by default become positively geared as the rents crept up, so, once it is, go and buy another property to off set the positive rent. You might have to buy 2 or 3 to try and balance it out, but if your capacity is there and your equity is there then there is no reason you could keep going until you had 100 properties.
Once you retire, sell 30 of them and then own the rest and get the rent from them then as an income.
Might sound good in theory, but works even better in practice.luke86 wrote:PISTORE wrote:Catalyst wrote:PISTORE wrote:The idea with any property investment strategy is to aim for a neutrally geared portfolio.Really??? What's the point in that? OK if you're working a job I guess but it certainly wouldn't be anyones aim.
My investment strategy is to be POSITIVELY geared. I want to be making money. The more positive my portfolio is the more money in my pocket.
It's all about balance. Positively geared portfolios are great until you start getting taxed for the privilege.
The way I see it is that if you become positive geared then go and buy another investment property to offset your positive gearedness (if that's even a word) this way your problem keeps compounding, which is a great problem to have. If you keep aiming at a neutral portfolio then Julia can't get her bit and you maximize your opportunity for growth.Why would you buy a property to save tax?
Cheers,
LukeLuke, it's not about saving tax as much as delaying and minimizing when you have to pay it.
I would much rather invest the money in something I think is a priority than have the Government make that "excellent choice for me.PISTORE wrote:luke86 wrote:PISTORE wrote:Catalyst wrote:PISTORE wrote:The idea with any property investment strategy is to aim for a neutrally geared portfolio.Really??? What's the point in that? OK if you're working a job I guess but it certainly wouldn't be anyones aim.
My investment strategy is to be POSITIVELY geared. I want to be making money. The more positive my portfolio is the more money in my pocket.
It's all about balance. Positively geared portfolios are great until you start getting taxed for the privilege.
The way I see it is that if you become positive geared then go and buy another investment property to offset your positive gearedness (if that's even a word) this way your problem keeps compounding, which is a great problem to have. If you keep aiming at a neutral portfolio then Julia can't get her bit and you maximize your opportunity for growth.Why would you buy a property to save tax?
Cheers,
LukeLuke, it's not about saving tax as much as delaying and minimizing when you have to pay it.
I would much rather invest the money in something I think is a priority than have the Government make that "excellent choice for me.I just think buying a proeprty to save tax is crazy- takes breaks are just the ciing on the cake for me.
Cheers,
Luke"icing on the cake" rather
While you are working a neutrally geared portfolio may work but unless you follow the Living OFF Equity Model you won't be able to quit the workforce.
A positively geared portfolio can give you enough cash to retire.Cash will give you a living but it will not make you rich. You also need Capital Growth. If your properties never go up you will always be at the same level of income (assuming rents rise with inflation).
PISTORE you say if you are positively geared just buy another negatively geared property. WHY??? I'm buying as fast as I can but because I buy/reno/rent my LVR isn't going up and I'm actually gaining cashflow each week (AND equity with the reno). I'd rather make money and pay tax than lose money on purpose to avoid tax. If I earn too much I'll just go parttime at work (I don't want to quit as I love my job). Maybe next year.
I want it ALL!!
PISTORE wrote:Laury wrote:My assumption of neutral gearing is that after you have crunched all the numbers including depreciation etc Mr Taxman chooses not to take a cent off you but in reallity you have actually put a couple of dollars in your pocket. Please correct me if I am wrong!Essentially your right. It's about running the books at a balance. Remember, you don't make money from rent, you make money from growth. The rent is what enables you to cash flow the property long enough to make the growth.
EG: lets say you had 4 investment properties. 1 was Negatively geared and 3 were positively geared. If the numbers were done right, you could own all 4 of those properties 4 $0 out of your pocket every week.
After a while, your portfolio would by default become positively geared as the rents crept up, so, once it is, go and buy another property to off set the positive rent. You might have to buy 2 or 3 to try and balance it out, but if your capacity is there and your equity is there then there is no reason you could keep going until you had 100 properties.
Once you retire, sell 30 of them and then own the rest and get the rent from them then as an income.
Might sound good in theory, but works even better in practice.Sounds like a beautiful plan,now if only I can make it work……….
Been off line for a little while here.
The key is as Luke (?) said earlier – it all depends upon an indviduals circumstances.
For me bottom line is portfolio should be at least genuinely neutral (exc tax breaks) at time of retirement. This means the portfolio is being held without any erosion of other assets to hold the portfolio either through an injection of cash from savings, super-fund, share dividends or using a line of credit to fund shortfalls. Such a structure will allow for a gradual sell-down of assets in retirement and for the individual to live off any capital proceeds.
A staged sell down in low/no income years also reduces CGT exposure. The downside of this strategy is that once the asset is sold – its gone so you have given away future growth. Mind you in the current climate you cannot live off growth. Or at least the brokers I speak to indicate it cannot be done.
Obviously a cashflow postive strategy will be dependent upon the individual building up sufficient income to meet their lifestyle needs. And you will need a lot of $100/week cash flow postive properties to do this.. Once again other assets such as shares, savings, super, part-time work etc may be sufficient to supplement a smaller, less cash flow positive property.
Of course then there are the properties which are significantly cash flow positive. We have done some modelling on Pilbara property which indicates it could be, based on current projections, be possible to retire on $67K/annum on one property in about nine years time. Clearly throwing all eggs in one basket is a higher risk strategy so individuals need to consider a more diversified and balanced portfolio.
Bottom line is – one size does not fit all. We are all different, have different super balances, cash savings, share portfolios, managed funds, property portfolios, appetite for part-time work, inheritance capacity etc. Suggesting anything else is erroneous.
Final comment – cashflow is important – IMO a growth strategy that still has a negative cashflow portfolio in retirement HAS to be sold to release funds.
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