Is neg gearing usefull at all??

Considering myself a newbie in property investment
the inputs here have been really good education
for me.

There is only one main issue that keep sticking
out at the back of my mind stopping me from taking
the next step in investing in more IP.

All investments (stocks or IP) require capital $$
to get into and for most it means mortgage/loan.
In order to make the whole exercise work, be it
-cf or +cf, the bottom line key factor is the
cashflow! Just like running a biz, one could be
profitable but without the cashflow as the life
blood, it can choke survivability.

Till this day, I have still not been able to find
a good safety net to cover for income loss due
to job loss in order to sustain -ve geared investment besides my own living.

It’s great to have tax-break especially for high
incomer earners, but I can’t help thinking of
the reality if one losts his job & can no longer
get the same level of income & cashflow to fund
the -cf gap. It will surely have a big impact on
the overall plan, won’t u agree ?

Guess I am paranoid, but I have yet to find a
strategy or system that could let me invest with
peace of mind and not having to solely rely on
the main income source as the cashflow to service
the loan.

Any comments on that ?

MCW

Hi Mcwong

I agree with Kay. Life, business and investing is risky. Successful investing is about managing your risk.

If you’re looking for the basic rules to wealth creation (and avoiding the excuses) read “The Richest Man In Babylon”.

Glenn

Hi,

Just remember that depreciation is tax deferral, not tax saving.

Negative gearing is a useful strategy, but only when the market is appreciating at more than the associated loss.

On a slightly different topic, on last nights MAP conference call, one of the participants as found a property that is $4k p.a. +ve cashflow based on 100% finance… any thoughts about this?

Cheers,

Steve McKnight

**********
Remember that success comes from doing things differently.
**********

SIS,

Never say ever?

What about funding a replacement asset when the other one wears out… just be mindful of the Ansett lesson and an old fleet.

Still, you’re spot on when you say there is a benefit… but just be aware that it can be a double-edged sword.

On a different note, thanks for your continued support with this forum board – it’s much appreciated.

Good night,

Steve McKnight

**********
Remember that success comes from doing things differently.
**********

Steve,
good deal for the MAP it would seem.

Are you asking for thoughts on how to calculate the return?

if so. you could calculate that $4k against any closing costs.

or.. maybe calculate against a money value created for time spent researching the deal if it was no money down.

Ie: say 50 hours setting it up and value your hours at about say $25 bucks an hour.

You could work out the effective return for the prop as a standard for any more deals you set up.

ie $4000 / (50 * 25) = 320% annual return on time spent (@ $25 per hour)

Were you asking about this?

[daisy]

lifexperience

I think it is great to hear about all these +ve properties, beach front locations etc. bla bla bla

But are you brave enough to provide further details…. Lets get real here, lip service is cheap…..

I’m still flogging this donkey:

If I can find an IP with 0% down AND it is +ve CF from day 1, then (in terms of what I am reading all over the forum) I am a wise property investor with an eye for a bargain and worthy of much acclaim.

If I find an IP and I finance it with anything higher than 0% down (say even 100%), then in terms of income and expenses I can achieve +ve CF – but now I have cheated! [evil4]

The downpayment is also CASH folks. I took some of my CASH and I tied it up in the IP. Much rather take that CASH and spread it about – and yes, spend some on those many -ve CF IPs every month.

What I am trying to establish is that, IMHO, +ve CF is a RELATIVE term. I think we need to agree that a consistent definition is that a +ve CF IP must be with zero downpayment.

If I tie up 100% downpayment (or less) to be able to cry out “I have a +ve CF property that earns me $50/week”, then I’m being silly.

If one looks at the overall investment return (such as with IRR) using cashflow over a longer period (than this week or year), then a -ve CF IP turns +ve at some future date, as a result of inflation and fixed repayments.

Am I right or am I right?

So, is 0% down the TRUE definition of +ve CF?

Really enjoying the debate!

Hi Glenetti,
I disagree that it has to be relative to 100% down.

If you can do any deal that is cash positive, great!!

To find out how great it is you then work out the Cash On Cash Return.

True, if you put a big deposit down you can make any prop cash positive, but at what cost? This is where the COCR gives you an indication.

COCR = Money out of your pocket to make deal

The terms are already there.

I think most would agree a COCR of 10% or more is very cool. This is near impossible if you pay a large deposit like 90-100%.

Am i making sense or have i missed ya point?

[cowboy2]

lifexperience

OK, brace yourselves, here it is…..

Much has been written about the value of positive cashflow (+CF), or positive gearing on an investment property. Cashflow, however, is subject to the time value of money, so looking at initial CF is a short-sighted view. The deposit payment made by a purchaser on an investment property is often ignored in the CF calculation.

Consider a hypothetical case for demonstration purposes:
$100,000 Purchase price
4% Inflation (applicable to rental and
outgoings but NOT finance payments)
$645 Net monthly income (rent less outgoings) excluding finance payments

Let us consider two financing options here, both at 6% interest over 20 years:
Case A: Zero deposit = ($716) monthly payments
Case B: 20% deposit = ($573) monthly payments

This means that (in terms of the definition often bandied about):
Case A is CF negative at $645 – $716 = ($71) and therefore BAD[glum]
Case B is CF positive at $645 – $573 = $72 and therefore GOOD[smiling]
This definition of cash flow glibly ignores the $20,000 CASH deposit.

Looking at the actual annual CF, reveals the following:
Annual Cash Flow
Year Case A Case B
0 $ 0.00 $ -20,000
1 $ -550.69 $ 1,168.74
2 $ -228.83 $ 1,490.60
3 $ 105.90 $ 1,825.33
4 $ 454.02 $ 2,173.46
5 $ 816.07 $ 2,535.51

Converting this to cumulative CF, results in:
Cumulative Cash Flow
Year Case A Case B
0 $ 0.00 $ -20,000.00
1 $ -550.69 $ -18,831.26
2 $ -779.53 $ -17,340.66
3 $ -673.63 $ -15,515.32
4 $ -219.60 $ -13,341.86
5 $ 596.47 $ -10,806.36

This shows that the –CF investor in Case A has actually earned about $600 after 5 years, while in Case B with +CF the investor is still about $11,000 out of pocket. This demonstrates that –CF (by the broad definition used) is not necessarily a bad thing.

Many start-up property investors might believe that you need a deposit in order to start, or that you have to find a +CF property. However, if the –CF is manageable within your monthly personal cashflow situation, then one does not need the capital and the negative cashflow is not necessarily bad.

As property is generally a long-term investment, a long-term analysis tool that takes the time value of money into account is required. Internal Rate of Return (IRR) provides just such a tool.

IRR over 20 years shows that Case A has a return of about 62% while Case B has an IRR of 19% (assuming capital appreciation at inflation rate over the 20 years as well). This also demonstrates the advantage of leverage by using OPM.

Which returns me to my initial question of at what deposit level do we consider a property investment positive or negative? By the definition used above for Case B, I can make any property investment cash flow positive by increasing the deposit and ignoring the fact that the deposit is part of my cash flow.

A true definition of a +CF IP should be one where there is zero deposit. Everything else means we are trying to fool ourselves and comparing pears with apples.

Whadayasaynow?

Glenn

Just to reply to MCWong, A good (safe) strategy (one taught by richmastery at their seminars) to avoid having to be forced into a sale if you lost your job, not to mention a good sustainable long term buy and hold strategy with the best of both worlds, is to buy 3-5 +ve CF properties to every one neg geared growth one. This means you can keep on buying because you never max out, the portfolio is +ve overall. The other thing about continuing to purchase is that the risk of vacancy affecting your bottom like gets less and less, the more properties you have.

That is why blocks of flats (+ve CF) can be a great thing to have in your portfolio as you get multiple streams of income from the same property.

cheers-
Mini

PS Marisa, as for ‘where was this waterfront property?’ It was in the north island of NZ.
This particular property was so run down it was decrepit, (we didn;t put an offer in on it for this reason) and although CG when buying waterfront is almost assured, and although the house was ‘in theory’ CF+ve as it was tenanted as is, the house in my opinion would have needed to be demolished or seriously have money poured into it. Therefore, not really being +ve CF. – would have turned into a neg- geared property. As I am finding +ve CF properties for investors with the bird-dog thing we’re doing in NZ, a property that could easily turn into a neg geared one, well you may as well just stay in Aus and buy on of those on any beach you choose, there.

I’m not going to divulge the exact name of the place, for reasons I would be embarassed to mention, and you probably wouldn’t believe anyway.!!!!

joy to the world