All Topics / Help Needed! / Is neg gearing usefull at all??

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  • Profile photo of 2Monkeys2Monkeys
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    Id like to one day retire from working and live off the passive income (who doesn’t!). This is a goal but realisticly its relatively long term goal.

    In the short term, is it recommended to aquire an inv property which is neg geared to off set the passive profit from the pos cashflow properties to minimise tax?

    Or should i avoid neg geared prop all together?

    Thanks in advance,

    Voytek

    Profile photo of TerrywTerryw
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    It really depends on your strategy, etc. Both positive and negative gearing has worked in the past.

    I wouldn’t be too concerned about minimisng tax. If you set up using a trust structure, it leave lots of opportunites to do this – now and later. Look more at the deal itself.

    Terryw
    Discover Home Loans
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    Profile photo of melbearmelbear
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    I think negative gearing definitely has its uses. If you don’t plan to retire *immediately*, and can afford to put some $$ towards the property each week, then it can enable you to buy a property that will have growth.

    I have found that my neg properties have grown substantially over the past 10 years (even before the boom). The tax returns have been nice too!

    You can always sell one or two of them to pay down debt, and make the portfolio very positive when you want to retire, or reborrow against the equity, or just sell to ‘spend’ the profits.

    I think you have more options if you can buy a growth property, than if your portfolio is purely positive, with not much growth.

    Cheers
    Mel

    Profile photo of wejons1wejons1
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    Voytek,

    This is only my opinion.

    Neg gearing can be useful if it fits in with your situation. The ideal solution is that every property is cf+, money in your pocket instead of going out.

    However, a neg geared property can be used with the intention of “hopefully” the price rising and this is where you benefit. If you have cf+ properties then you could use that moneyto help pay for the cf- one(s).

    My assumption with a cf- property is that after gaining capital growth, you sell the property to realise the gain and then use the gain to either pay off other properties or reinvest.

    People also use the cf- properties to help reduce their tax.

    It all comes down to your own personal cashflow situation. If you can afford the cf- properties, then they may suite your portfolio.

    My two cents worth.

    wejons1

    Profile photo of DerekDerek
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    Hi wejons,

    Buying a property with the sole purpose of reducing tax has to be considered a little silly to say the least. If however you fully research an area and find a property with all the indications of realising growth in excess of the negative cashflow then I would consider that you are in front at the end of the year.

    For me growth is my major focus and I am of the opinion that this is most likely to occur on a more regular and long term basis in cities. I consider there are far fewer risks invetsing in larger centres over the long and short term.

    At this stage of proceedings I am focussed on gathering a portfolio of growth properties that will allow me to pursue a number of options upon retirement along the lines that Mel discussed and also an extension of borrowing off the equity as per Steve Navra’s cashbond strategy.

    Asset/debt ratios and income levels are essential ingredients when banks assess you for further borrowings – therefore both do have a place.

    Derek
    [email protected]

    Property Investment Support Available. Ongoing and never stopping. PM welcome.

    Profile photo of glenettiglenetti
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    From the above I’m interpreting the general trend to be:

    +ve Cashflow IPs generally don’t show much capital growth.
    -ve Cashflow IPs have brighter prospects of capital growth

    I’m still in the dark as to WHEN one can define a deal (ito % money down) as +ve or -ve….? If I put down 100% it is bound to be +ve, but not much leverage there.

    Anyone managed to buy a beachfront property that ended up with +ve cashflow from the beginning?

    Profile photo of MonopolyMonopoly
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    @monopoly
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    Originally posted by glenetti:

    Anyone managed to buy a beachfront property that ended up with +ve cashflow from the beginning?

    Good question: would love to know the answer to that myself; I hardly doubt it, but would be only too glad to be proven wrong. And if so, where did they buy??? [blink][blink]

    Jo

    Profile photo of MonopolyMonopoly
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    Sorry, meant “higly” not “hardly” doubted.

    Jo

    Profile photo of MonopolyMonopoly
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    @monopoly
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    Man….typos!!!! I mean “Highly” (at last) [blush2][blush2][blush2][blush2]

    Jo

    Profile photo of wejons1wejons1
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    Hi Derek,

    Fully agree with you regards buying for tax reasons, but people do do it for reasons that make sense to them I guess, so I thought I would mention it. I personally look at any tax “breaks” as a bonus, not the reason for buying a property.

    rgds
    wejons1

    Profile photo of RussHRussH
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    Glennetti.
    What do you mean by beach front.100 metres from the water or a beachside suburb.
    If u r refering to the later I know of heaps of +CF property next to the beach.Just depends on which beach.
    Russ.[king]

    Profile photo of MiniMogulMiniMogul
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    “From the above I’m interpreting the general trend to be:
    +ve Cashflow IPs generally don’t show much capital growth.”

    That’s what I always thought, but I have found that (at least in NZ) CF+ve areas tend to be the most undervalued areas! And they go up the same amount as everywhere else, just that, they do it later – the growth ‘wave’ starts in the cities.
    Also the properties at the bottom of the market seem to go up quicker, because there are of course always more buyers ‘down there’

    just my two cents. Having bought 3 x CF+ve properties yielding 20 percent which ALSO went up in value 60 percent in a year.

    cheers-
    Mini

    PS Just remembered that westan can probably add to this with some evidence – I remember him telling me about properties he bought 6 years ago which tripled in value in 6 years. They were in the classic ‘What are you doing buying there? You won’t get capital growth’ kinda areas. And believe me, we both got mega growth as WELL as +ve cashflow. +ve cashflow is of course much easier to ‘hold’ and you can get to your retirement goal quicker. I.e. 1 mill of CF+ve property makes you 100K per annum. (15 percent yields, give or take your level of debt.)

    However you’d need 3 million of 5 percent yielding properties to make the same 100K a year in income. give or take your level of debt.

    And by my logic it’s a lot quicker to get 1 mill of property then 3 mill. Besides, the income from buying the CF+ve properties mean you won’t max out.

    Mind you at the moment I am doing a mixture – 3 CF+ve properties for every one negatively geared growth one balances out and means portfolio is +ve geared overall.

    cheers-
    Mini

    Profile photo of AceyduceyAceyducey
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    Here’s a unseful strategy.

    Buy enough CG positive properties that their annual income allows you to buy a free (CG positive) property with a 20% deposit each year.

    Repeat.

    Ignore everyone advocating buying negatively geared properties – they’re at the mercy of interest rates & government laws on negative gearing & depreciation….

    Cheers,

    Aceyducey

    Profile photo of glenettiglenetti
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    Thanks for the useful contributions to this (flogged to death ongoing) topic.

    Russ, anything close to the sea cf+ I have not discovered yet – so it is good to hear about it. Will just have to try harder.

    My one question remains though.

    Can I consider a property investment cf+ at what deposit level?
    0%, 10%, 20%, 30%…… at 100% everything is cf+. So where is the cut-off point?

    Is there a definition out there?

    Glenn

    Profile photo of MiniMogulMiniMogul
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    there is absolutely such a thing as waterfront CF+ve.
    cheers – Mini.

    clue: it’s not circular quay

    Profile photo of MonopolyMonopoly
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    Originally posted by MiniMogul:

    there is absolutely such a thing as waterfront CF+ve.
    cheers – Mini.

    clue: it’s not circular quay

    Yeah but the duck pond just doesn’t cut the grade somehow [lmao][lmao][lmao]

    Sorry, couldn’t resist.

    Seriously, if that is the case, why bother with circular quay, surfers or the like??? Maybe these places are better off as their remoteness will mean you actually get some peace and quiet, away from the hussle and bussle of tourism.

    Jo

    Profile photo of kay henrykay henry
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    Here’s a post I wrote elsewhere today on the subject of depreciation allowances, but also relating to negative and positive gearing. The context of it is in response to another person’s question about depreciation, so bear with it if it doesn’t seem initially relevant- or just don’t read it :+P

    _____________________

    Cel,

    A reply to your queries about depreciation. Say you have one house with depreciation of 5k. That will reduce your taxable income. So say you were earning 70k. You would be paying 47 cents in the dollar ONLY in that 5k above 62k. So your new taxable income would be now 65k. So you would get back 47 cents in the dollar for the 5k you had reduced your taxable income by (approx 2700 back)

    Now if you multiply that… And you had 3 houses @ 5k depreciation each, your taxable income would be 55k. If you had ten houses @ 5k depreciation, your taxable income would be 20k. You would then fall into one of the lowest taxation categories. You would get a tax return of many many thousands.

    I do not agree with Steve’s tip about being in trouble if you have to rely on depreciation/tax breaks… as a person who earns a reasonable income, I do enjoy the tax breaks I get. I would rather receive 15k back from tax than nothing. for low income earners, tax breaks might not mean much. Also, if you buy very old houses, you might not be able to receive much back in depreciation (although you can ask Chan about depreciation- he depreciates all his places- no matter what the age of them, and he says it is hugely worthwhile). Remember, that if you buy a place that is post 1987, you can receive a 2.5% depreciation allowance on the cost of the building. But depreciation (fixtures and fittings) will work even for pre-1985 0r 1987 buildings.

    If you are a high income earner, you will be seeking tax breaks. It’s why RE is so incredibly popular- because we achieve huge tax breaks. It’s also why I have no issue with neg gearing, because the tenant, the tax dude and me pay for it- just like I’ve always done :O))

    15k tax return is a good deposit on a new place- and you can get that every year- but ya might have to get together quite a portfolio to do so If you have a positively geared portfolio, and you were earning say $20 (clear) a week X 10 properties, you would be earning 10k from them. So you would be paying tax on the 10k each year. If you were in the top tax bracket, you would have to pay about 4k back to the tax guy. That’s presuming your houses were really old and you decided not to depreciate them (400 bucks on a QS (X 10 properties = 4000 bucks) can add up and eat into your profits.

    It’s really a numbers game, and I think newer properties, with depreciation allowances, for high income earners, can absolutely provide a positive outcome.

    When people talk about making a profit on RE- as in pozz gearing- it really depends on the individual’s circumstances. $20 profit a week per property can become $12 a week after tax. That’s enough to buy a gourmet sandwich and a milkshake. Using tax is an equally viable way to build wealth. I think some people see neg gearing (growth properties) as only useful when you sell- thereby realising the CG. Not so- each year you get back some of the pofits on your losses!!

    kay henry

    Profile photo of MiniMogulMiniMogul
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    “Seriously, if that is the case, why bother with circular quay, surfers or the like???”

    Uhm,,, I dunno. Maybe you’re a squizillionaire and you want somewhere flash to live? Maybe you need to lose some money to save tax? (heheh)

    “Maybe these places are better off as their remoteness will mean you actually get some peace and quiet, away from the hussle and bussle of tourism.”

    Remote? Well I guess that once upon a time Byron Bay was remote…

    seriously, define remote. I admit I was talking about NZ. There is no such thing as ‘remote’ compared to how ‘remote’ an Aussie property can be. The place just isn’t that big and the nearest sizeable town (banks, RE agents, warehouse) is usually an hour away or less.

    The last two places I spotted absolute waterfront and still CF+ve (i.e. around the 60-70K, rents for 150 per week mark) was in a couple of places – one a city of 40000 and one a town of 9000.

    i.e. so not ‘remote’ if remote conjures up Broken hill or similar, not that that’s waterfront anyway.

    There are some parts of NZ where cattle graze right down to the beach (cows on the beach!) – and believe me, it won’t be like that for ever.

    Kay, you can still use tax write-offs to legally minimise your taxable income, even if your properties are *making* money. For instance, I can legally depreciate 93 percent of the PURCHASE PRICE of my properties at 4 percent, ( i bet you don’t even believe me…but it’s true. I mean, that’s more than the average Sydney yield. Yah.)
    …. not to mention the cost of my home office, airfares to inspect the property, and the like. Just so you know.

    Also to sum up my feelings on negative gearing, i don’t necessarily think it’s bad. I just think that if that’s ALL you purchase, you won’t be able to afford to buy any more after a point – depending on how much spare cash you have left to pay into the losing -money properties….

    i think the perfect solution is a balanced portfolio with enough CF+ve properties to ‘support’ the neg geared ones. think I might use that strategy myself…*whistles happy tune*
    that way you get growth (engine to get ahead faster) and serviceability (CF properties give you passive income.)

    i.e. my three NZ IP’s are helping fund a slightly-maybe-neutral-ish Aussie capital city property (7.5 percent yield.)

    Profile photo of MonopolyMonopoly
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    Minimogul,

    I am specifically referring to oz. I have absolutely no doubt that NZ has CF+ properties which are located on waterfront….after all, NZ is surround by water is it not????

    I was more curious to know about those here. Can you think of any? I’d love to know.

    Jo

    Profile photo of kay henrykay henry
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    Mini said:

    “Kay, you can still use tax write-offs to legally minimise your taxable income, even if your properties are *making* money. For instance, I can legally depreciate 93 percent of the PURCHASE PRICE of my properties at 4 percent, ( i bet you don’t even believe me…but it’s true. I mean, that’s more than the average Sydney yield. Yah.)
    …. not to mention the cost of my home office, airfares to inspect the property, and the like. Just so you know.”

    Mini, of course I believe you. We all use the taxation system to minimise our taxable income. I just use the taxation system to benefit from “losses” incurred over the year. I jut don’t really see my investments as losses. I guess the way I see investing, is that I put all the money I can into my investments so that at the end of the day (towards retirement) I can actually have much more than I had at the beginning, and I would not have been able to do this without RE.

    I don’t have properties in sydney either, Mini. I doubt I would ever be able to afford one, personally. Too exxy for me. My approach has not been to buy the most expensive properties I can. It’s basically been to find the “best value” properties I can, and that’s defined by each person. For some, it’s to achieve 10.4-15% yields. For me, I am now going to focus on “unique” properties when I can. That doesn’t mean hugely expensive, it just means they have an aspect to them that I believe will assist in maintaining their value. I also have no grand beliefs that property will achieve huge CG over the next few years- it will be a bonus if it does. I just have a “slow and steady” approach to RE. I would be what might be termed a “conservative investor”.

    kay henry

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