Negative gearing does it have a place in a positive cash flow strategy?
I made my first visit to an accountant & after I told him that I will be renting an IP which was positive geared he had a look of horror on his face. [ohno]
When I asked why he explained that I would have to pay tax on any profits.
He then explained a way of restructuring which would give me some tax relief using negative gearing.
I then began to wonder is there a place for negative gearing in a positive cash flow strategy.
Negative gear to minimise your tax obligation then look for positive cashflow properties ????Does anyone have any thoughts ???
everyone has their opinions (and as they say “there are as many opinions in the world as there are %#%%#$%s”) but I believe the best strategy is a neutral portfolio, with CF+ properties covering your CF- growth properties.
your accountant is an odd one… I dream of large tax bills !
Extensive list of ‘Off The Plan’ property available for sale in Perth.John – 0419 198 856
I like Ausprops thinking a neutrally geared portfolio is the way to go.
If you’re out of work it can look after itself. Also there’s no financial pressure on you so you have nearly your entire wage at your disposal.
Although, negative gearing is beneficial for those of us who earn a huge income only to see it go in tax. In that situation why not sign up for some well-positioned IPs that are –ve geared.
I believe in diversifying your property portfolio. It is a personal thing though, depending on your desired outcome and personal income.
Myself being young, and on a fairly good income I believe in offsetting positive cashflow properties with negative ones. However, these negatively geared properties are slected specifically for capital growth (not just to save on tax).Maybe write out 3 different scenarios, positive, negative and balanced. See what you can afford, see what your comfortable with. See what the net returns will be after tax, depreciation etc.
Hope this helps…..
Interesting idea EquityKing,
though i do a very similar idea, and very much similar to Robert Kiyosaki and in Peter Spanns methods.
i use offset gearing and depreciation in my property portfolio,
highly geared margin lending on my medium term to medium risk share portfolio (though the pleasure of doing this is, as my share porfolio increases, i further more increase my margin lending amounts… and the best thing about this is… its free money…), and on the very short term, trade cfd’s, options and warrants on a daily basis…
and then from this point… money made from my option trading goes back in, and to buy more properties.
Cheers,
sisThanks for the reply’s , I have learnt a new work “Offset Gearing” .
I haven’t read anything about Offset Gearing , the books that I have read are pro negative gearing or pro positive cash flow.
It’s great to get feedback from people with experience & are willing to help.
I will do some more research !!!!!My accountant seems to have a strategy that will save me some tax by restructuring my IP ( selling IP to a trust ) , this will also position me to be able to purchase another IP with similar benefits.
It all sounds good but I wounded how it will work in practice ???[worried]
Another option that can be very useful is to negative gear shares to offset your positively geared property.
A risk with negative gearing property is flat capital growth combined with the long time that it can take to get out of a property when needed. Plus, neg gearing property becomes less efficient over time because your claimable items like depreciation drop off over time..
Shares, or even a high yielding index fund, can offer you the same tax offsets with the advantage that you know on a daily basis how you are going based on the share/unit price. The yield tends (not always of course) to be a relatively static percentage of income. eg last year I got a 4% dividend yield and 34% capital growth. This year my yield will also around 4%, with 20% capital growth thus far..
Big disadvantage? No bank will consider your shares as equity when buying more property – but because you can buy a small parcel and thus ‘dip your toe into the water’, I think it also has a place in a balanced investment portfolio.
cheers
EZ-Rent. The free tax and cashflow simulator for Australian property investors. Version 2 out now!
http://www.ez-rent.comHi Dom,
I come from a position where the real wealth in property is achieved through capital growth and have a portfolio that is neutrally geared after depreciation is considered.
The growth has created a situation where we have surplus equity which has since been leveraged into a specialised managed share fund and also into providing start up funds for a commercial development on the last remaining block of land in a satellite centre in Perth.
These last two strings to our bow are providing the ‘cashflow’ to support the next properties (maybe three) which will be ‘negative’ after tax but which will be blue chip performers in the next 10 years or so.
In essence our growth is through property and our cashflow is via share funds and/or other means.
Derek
[email protected]Property Investment Support Available. Ongoing and never stopping. PM welcome.
Domo,
Perhaps you also need to consider the future and just the NOW. How soon do you wish to stop working or perhaps you don’t wish to stop working. In this case negative gearing would probably work best as you have the ongoing deductions that are offset against your wage and allow you to have more income now. If you plan on working for 10 or more years then they’d most likely be another property cycle for you to make gains etc.
However, if you plan to retire in a year or two or even five, then you won’t have an income to offset the negative geared properties off against. Further you’d most likely need to sell one or more of your negatively geared properties to either pay off the other to then give you an income stream or to live off the captial gain. When that runs out you then need to sell off another, how long would the money you have to live off last? Where as if you have +ve cashflow, you don’t need to sell them off as they are providing an income stream without doing so.
Having said all of this we currently have a portfolio of 4 IP’s that are “offset geared”. However, future ones will be +ve geared as we want to live off that income. At this point in time we won’t sell the -ve geared one as it is providing us with the equity to purchase the +ve geared ones. Once we have enough +ve geared ones, then that won’t be necessary anymore.
Here’s something else to consider: one of our IP’s is +ve cashflow but -ve geared. This has occurred as the rent is higher than all the expenses, therefore +ve cashflow, however the on paper deductions make the expenses higher so from a tax perspective we get a tax return on the house. This house is the best of both worlds, but haven’t found another one like it yet.
Lastly, if you are paying tax it means you are making money. Also most tax agents are there for tax purposes and -ve gearing is mainly what is taught at uni. Not saying it’s wrong or right, just that you need to find the formula that works best for you. I believe there’s a place for both but it depends on individual circumstances.
Good Luck
PKIt’s unfortunate but I won’t be retiring in the next couple of years so I will be looking to invest for capital growth in the next property cycle as well as +ve cashflow to replace my salary.
I would also like to reduce my tax obligation.It seems there are 3 things that I need to look at :
1: How much longer to I want to work in a job for.( Another 10 years is enough for me )
2: Invest in a negative geared IP’s to Reduce Tax , these IP’s should be selected for their potential for capital growth.
3: Invest in positive cashflow IP’s to replace my wage.
I have one question regarding negative gearing , Since I will be working for the next 10 years is it best to keep purchasing negative geared properties until my tax bill is down to zero then start to look for positive cash flow IP’s ?
G’day Domo,
hope this reply finds you well. I think it comes down too ” the reason ” that you are investing too answer your accountants comcerns. I can so relate too professionals who look down upon positive returns. I have often said too friends what are you investing for? If you are investing as a highly paid professional (slave) which most accountants are then losing money is not investing? I love to ask the question If negative gearing is so successful then lets play golf tomorrow? The answer is of course no because they have to work? I think most of us who invest for positive returns want to get out of our jobs rather than reduce tax. I personally happily pay tax, after depreciation and expenses because that cashflow gets me closer too my goal of financial freedom. I have a few friends who are negative gearers and most are extremely cash flow strapped.
Hope too see you on the worlds beaches
landburn
Domo,
The best position to be in, is where you have a healthy balance in your porfolio, that is a combination of -neg and +pos IPs to help balance things out.
The biggest problem with most people who are heavily -neg geared is (as others have pointed out) being cashflow strapped. Problems arise when/if these investors need access to money quickly, and liquidity is an issue especially in the current property market, where you can’t just sell something like a house/unit off quickly to supply the needed funds.
Hence, you need property with growth potential (often found in -neg geared) and +pos geared for cashflow, or alternative shares or cash funds to get you through any financial storms.
IMO all cashflow positive or all negative geared IPs without any form of offset gearing, for the sake of liquidity is fool’s play, and it’s only a matter of time before you come undone.
Jo
landburn
I am in the highest tax bracket & have an IP which I am wanting to rent this IP will be positively geared which means approx half the profits go to the tax man.
Your opinion is that it is better to make $100 profit than to minimise my tax as the $100 is passive income.
It seems to me that positive cash flow is associated with a positive attitude eg I will make $100 profit.
While negative gearing is associated with a negative attitude eg I don’t want to pay more tax.
It takes allot to change ones mind-set especially when the accountants are advising you to make a loss.The rules say if you earn x amount you will pay x amount in tax , you can just accept it & pay the tax or you can legally work around these rules to try to minimise your tax but is the price for this your financial freedom as it would seem that reducing tax ties you to your job ????
Originally posted by Domo:While negative gearing is associated with a negative attitude eg I don’t want to pay more tax.
I don’t necessarily agree with this for all negatively geared investors Dom – those that are only focussed on this aspect of their investments will, in the main, make poor decisions as their reason for investing is wrong.
When I look at a property I analyse it to see what the likelihood of sustained growth is.
If these fundamentals are in place and if the cashflow is ‘negative’, yet still affordable, then the property will be considered as a suitable investment. I for one are quite happy to put some of my money into a good property for a long term gain – which suits what I am on the road to achieving.
Bear in mind my aim is to have a high net worth position when I ‘retire’ so that I can explore a range of possibilities then – for now I am focussed on accumulating those properties.
Bear in mind something that is negative today will not always be negative and that as recently as 12-18 months ago it was possible for investors to readily purchase a property that was cashflow positive within metropolitan areas – the dramatic growth, increased interest rates and flat rents have largely changed this situation in the meantime.
Derek
[email protected]Property Investment Support Available. Ongoing and never stopping. PM welcome.
While negative gearing is associated with a negative attitude eg I don’t want to pay more tax.
Domo,
You posted just after I did, hence I would also like to (as Derek has already done) comment on this statement. IMO those that view negative gearing in a negative light, do so from nothing more, than out of ignorance. There are pluses and minuses on both sides of the fence, and to say, that one strategy solely is better than the other (for whatever reason) is sheer, unadulterated IGNORANCE. [blink]
Do your homework, research the facts, then we’ll talk!!! [eh]
Jo
Another important thing is, you should diversify your assets, the reason being to this is… you need liquid assets, assets, which you could almost sell in an instance, and churn that money into other assets, or where the cash is needed quickly…
Cheers,
sisOriginally posted by Monopoly:Do your homework, research the facts, then we’ll talk!!!
Monopoly
I do speak partially out of ignorance as i am trying to work things out ….
The great thing about this forum is that there are people like yourself who are willing to put an opinion forward & help guide some of us.
My accountant is suggesting to make my positive geared IP into a negative geared IP so that I can save some tax.
Once I have all the details I can compare the difference & make a decision.
I will let you know how it go.Thanks
[specool]Originally posted by Domo:Quote:My accountant is suggesting to make my positive geared IP into a negative geared IP so that I can save some tax.Hi Dom,
Your accountant is looking at things entirely from a taxation angle – that is what accountants are generally employed to do – and if you are paying more tax it also means you are earning more – what is the problem?
Maybe you accountant is asking you to look for ways you can redirect your existing tax paid so it is used for better purposes.
You need to determine what you are trying to achieve by investing in property as this will determine what is right for you.
Derek
[email protected]Property Investment Support Available. Ongoing and never stopping. PM welcome.
Originally posted by Derek:
Originally posted by Domo:I don’t necessarily agree with this for all negatively geared investors Dom – those that are only focussed on this aspect of their investments will, in the main, make poor decisions as their reason for investing is wrong.
Derek
I have read a number of books on property investing & they either support -ve gearing or they trash it so things can get confusing.
Do you know of any resource available that supports Offset gearing as this seems to be a great strategy.
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