New investor testing the waters

Kym negative gearing aint necessarily bad. depends on your goal. Its fine in my opinion if you are focused on capital growth. But if you need cash flow then obviously its not for you.

You need a property investment calculator.
Plenty of these around check out a few to compare

http://www.yourmortgage.com.au/calculators/can_i_afford_investment_property/

Hi Kym

Answers in my Humble opinion

1. Negative gearing is a bad idea, it basically means you are losing money on the property and writing those losses of against your tax, why anyone would purposely go into a deal to lose money is beyond me, having said that you may be negatively gearing a property where the capital gain out weighs the losses and your own personal tax circumstances would benefit from such an investment. If you are in a position to negative gear then your definately in a position to positive gear. To make money in property doesnt mean youneed to own it ie have it paid of, you just need to control it, the more property you can control, the more money you can make. If you acquire properties that are +ve geared you can continue buying, if they are -ve geared then your servicablity issue kicks in which you can buy less a lot less.

2. Is finding gold a hard slog, is fishing a hard slog, if you dont know where to look or where to fish then yes, how ever if you educate yourself and learn what to look for and where to look then no, but you have to learn. If you can be creative in the way that you invest, ie wraps or option contracts, youll find info on both of these stratergies on this site, then you ensure you achieve +ve cash property.

3. Add up all direct and indirect expenses to hold and maintain the property for a 12 month period, divide it by 52 this will give you your total holding costs. Determine your potential vacancy rate per year by reaserching the area, ie 3 weeks per annum, then multipy your expected weekly rental by 49 weeks, then divide it by 52, and if your adjusted weekly is higher than your calculated holding cost then you have a positely geared property.

Hope this helps
regards
John

Hi Kym,

1) No, neg gearing is NOT a bad idea per se.
This website is biased towards +ive cashflow, so you may find some replies will be biased towards this. If you want to get some excellent info at a more diverse forum, check out Jan Somers at:

http://www.somersoft.com/forums/

Somersoft is Australia’s largest forum and has a lot of industry experts who visit the board to give excellent advice. Some also moderate on the board including accountants, quantity surveyors, professional renovators, neg gearers, pos gearers, wrappers, flippers, real estate agents, developers – you name it.
The MSN forum is also more diverse but has less members. It can be found here:

http://groups.msn.com/PropertyInvestment/messageboard.msnw

With neg gearing, the higher your marginal tax rate, the more benefits you will get. As some have said, neg gearing is usually done with properties that will achieve high cap gains. Because rents haven’t kept up with property prices, yields are lower which means you may have to neg gear unless you can put up a decent deposit.
Properties that are cashflow +ive are usually found in rural areas with minimal/nil cap gains. You also must remember that if you want to increase your wealth (assets minus liabilities), you’re better off investing in property that has high cap gains.
If you want cashflow, invest in these rural areas and you may get a return of about $1k – $2k per annum – which you have to pay tax on.

2) cashflow properties are easy to find. Do a search on http://www.realestate.com.au for properties under $100k and you’ll find loads.

3) Anything with a gross yield of about 10% or more will be positive.

Yea Alison I see ur point, High cap gains can easily outweigh holding costs in 1 year. So if you couldn’t handle the costs you could sell and still come out ahead. If you buy quality property, selling would not bee too hard a task.

On the other hand +ve chash flow is also useful if you need the cash. But if you end up having big repairs down the track, all that saved cash could be eaten up. Now depending on the capital growth area, the scales could tip either way.

It’s a real challenge being able to estimate that far ahead. Some areas have been know to go backwards i.e. -ve capital growth. rural areas in particular more prone to this characteristic.

interesting you mentioned the 10% figure gross return on investment ( net return is much less say 4% ) , for a benchmark +ve cash flow property.

When you consider at my first glance, holding costs are appearing to me to represent about 1% of a -ve cash flow brand new investment properties value.

More interestingly good capital growth areas are yielding 10% + growth on the investment before CG tax. Thus a pre CG tax ratio of cost verses growth of 10 to 1 can be attained per annum.

Thus for every $1000 it costs to hold the property after tax effects, the property value is increasing by $10,000 over the course of a year.

Now if your investments are structured correctly, when you sell one IP you could reduce the CG

At the end of the day, the numbers have to work and either scenario can succeed or fail. It becomes an issue of risk management

Anyway I’m a newbie still so much to learn on this stuff.

So I guess its horses for courses.
PPP Position Price Property