Hi,
I am sorry for this being so basic and simple…..I don’t know whether I am not thinking straight because of lack of sleep, but…..
If you purchase an IP, which is -CF, how does one make money without selling and without looking at increased value of property.Any income generated is taxable, which you declare…. brings you back to Square 1.
You get Tax Benefits on related expenses, but then you had to pay the expenses to start with…..If you borrow $300,000, Interest at $1750/mth – And you make $1750/month income – then they cancel out.
You then claim expenses – $2000 rates, $2000 Body Corp, etc and get back $1200 – still leaving you short $2800……Am I missing something? I am certain I am – someone please open my eyes
Hi Insan3,
No one in their right mind should look at a -CF of -N Geared property if they do not take into consideration the expectation of Capital appreciation.
It’s not about getting a tax break, -N Gearing is just more tax effective if you are in a higher tax bracket. The Strategy of negative gearing or having a negative cash flow should still ultimately be about the Capital Gain expected from being out of pocket.
I have -CF properties that in total cost me about $12,000 a year to keep, they have however over the past 12 months had capital gains of $75,000. If I didn’t expect growth there is no way I’d have purchased these properties. Rents have also increased by 12% in that time.
There is also Depreciation to consider. In you example $2800 may not be an unreasonable deduction for depreciation.
Mal
Getting out of your comfort zone, can help you become comfortable
Although most people who negative gear actually lose money, they make it up through capital gains (sell or revalue (you can live off equity, though there is much debate about this strategy)). Or if you pay P&I (Principal & Interest) over time as rents go up, but your mortgage repayments stays the same the rent will overtake the repayments creating a +CF situation.
In your example you forgot about depreciation write offs. This is a non cash deduction, which means you get a tax break for investing in housing. Usually depreciation can be between 1-3% of a houses value, and in Australia you can apply that aginst other income so your taxable income is reduced.
So for your example, based on your figures:
Who Pays What (over 20 years)
Tenant $584,462 100.36%
Tax Dept. $34,555 5.93%
You ($36,625) -6.29%
Total $582,392 100.00%This property will pay you: $29.07 per week after all expenses.
So if your property rises more than $1,560 per yr, your making $$$.
hellman
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