[?][?][?]Can some one give me the short and skinny on properties that are
a) Negatively geared but positive cash flow
b) Positively geared and positive cash flowThis is probably a really dumb question but would someone please humour me here[
][][]I can see that this post is being read but can some PLEASE PLEASE PLEASE give me some advice here.
Not sure what you mean by short and skinny? I’m only a newbie myself but in terms of definition, I think this is the basic scenario:
1)Your cashflow is positive in that the rent is greater than mortgage + running costs, but when it comes to tax you make a ‘paper loss’ because the amount you claim due to interest payments, depreciation etc negates your cashflow (so you get a tax deduction even though you are making money). Rolf de Roos talks about this I think.
2)As above your cashflow is positive but even once other costs are taken into account, your cashflow is still greater than your overall paper loss. Thus you’re positive gearing.Personally I’ve love number one right about now seeing I’m about to hit the really yucky tax bracket…
Have I got it right everyone else?
SamHi kelly1100[
]
Gearing or leveraging is using borrowed money to enhance returns on investments.
The higher your gearing ratio,the higher your profit.For instancce if you invest $10k of your own money at a return of 10% per annum you would receive $1k.
If you borrow an extra $90k then you would make $10k less the borowing cost.
If an investment returns more money than the costs then it is positively geared,and as such earns income which is taxable.As it earns money it will enhance borrowing capacity.
However if the investment loses money it is negative geared .This produces a paper loss for tax credits.
The rent received together with the tax saved and depreciation claimed will offset this loss.All other expenses incured can also be claimed.
This may or may not result in a positive cash flow according to circumstances.
Regards
Bryce Inglis
[email protected]
http://www.ipal.com.auHi Kelly,
Don’t know if this going to be short or skinny, but here goes:
There are only two types of properties:
– Positively Geared
AND
– Negatively GearedPositively Geared
A property that is positively geared means that the rent covers ALL costs (rates, interest on mortgage, maintenance etc…)
Also, when analysing a property to determine whether it is -ve or +ve you generally do the calculations on borrowing 100% of the cost of the property, and therefore paying interest on this full amount. (i.e it is 100% geared or 100% leveraged)
Therefore if a property will cost you say 250K including lawyers fees, stamp duty etc… you will base your calculations on borrowing 250K. Whether you do this in practice is another question. Generally people will have equity in their PPOR which will allow them to borrow 100% of the costs of buying an IP.
Negatively Geared
A property is negatively geared if the rent does NOT cover all your costs. (Again the calculations are done based on the fact that you have borrowed 100% to acquitre the property).Now, having said that a negatively geared property can be positive cashflow depending on whether:
– It was built after 1985 and therefore you can claim noncash deductions (i.e. depreciation.) AND you have another income stream (i.e. your day job).
This means that for the SAME negatively geared property, for some people (who are in the top tax bracket) it will be positive cashflow and for others (who have a lower income) it will be negative cashflow.
– The amount you but into a property when you buy it. This is very simple. Say a property costs 300K and you have 300K in the bank. You decide to buy the property without borrowing anything. This property will then be positive cashflow, because you have no interest repayments and the rent will cover all the other costs. Is this a good way of investing? depends… won’t get into now…
In summary a PROPERTY can only be positive or negatively geared, it is the INDIVIDUAL buying it that can make it become positive cashflow.
Anyway I hope this all makes sense. If not ask more questions.
Pin
Hi Kelly,
A book that will help you is How to create an income for life by margaret lomas.
][
]
You must be logged in to reply to this topic. If you don't have an account, you can register here.
