Just wondering what people think of negative gearing for the long term. Doesn’t all property become positive eventually & can’t you speed up the process by doing the following?
1. Paying interest + principle
2. Making improvements
3. Increasing the rent periodically
4. Using your tax refund as cashflowWe purchased 2 negative properties (in 2001& 2004) and the 1st has become positive and the other will in the next 18 months. So for the long term, if you follow the above steps can’t you build wealth this way?
The only downside to this is that you can only buy a house every 2-3 years before it starts to hurt. But buying a house in a blue chip suburb & holding onto it for a few years makes me more comfortable than using the same money for buy 5 houses in mining towns etc. that grow slowly.
I know many of you will disagree which is ok, because I’d like to know your point of view. I was wondering if someone can find a downside to my strategy, other than the fact that it’s very slow & safe?
There is no doubt that wealth through property is made by capital appreciation over time but how many people can buy and hold over 5 negative cash flow properties for the long term while waiting for captial growth?
Certainly not me on my income, I can’t even support one [cigar]
The only reason we manage to keep accumulating properties is because the negative ones are balanced with positive cash flow
I don’t beleive in going out and buying an old whetherboard house in Alice springs for $90,000 just because the rent is $200 per week, if there is no capital growth, you are exposed to dept and the $200 per week is not going to do much in terms of wealth accumulation in the long term!!!
So, negative gearing means that you will hit a brick wall in terms of serviceability and for most people the max is 5 properties, positive cash flow without capital growth leaves you exposed to dept (high risk!!!), what is the solution….
Getting creative
We keep well away from rural areas, I like creatively manufactured cash flow on properties purchased where civilisation exists (people not cows produce capital growth in properties [biggrin] ). Properties that are well poised for capital appreciation and would have been negative cash flow in the absense of creative strategies.
We use 2 creative strategies:
1. Leasing with an option to purchase. This has the effect of turning some negative properties into positive.
2. Multi-tenancy accomodation (leasing out by the room). This can also turn negative cash flow into positive.Both of these strategies have the effect of turing a hobby into a business and cash flow from that busienss can then purchase more lucrative hobbies
That’s us, it works, we’ll keep doing it[biggrin]
Investment Property Management
http://www.adprop.com.auWell a few weeks ago I was thinking that my property would be negative cashflow. But now this is my idea.
Buy a house around $250K, move in for 6months and claim the FHOG(and the stamp duty discount) renovate it tones(cheaply but effectively), then after the 6months move out and rent. With the renovations I will be abl;e to rent out at much higher rate than if i didn’t and that will push me into positive cashflow. This also has the added advantage of the increased equity as the renovations will add considerably to the properties value.
I’m planning on getting a bargain(250kpurchased, but like 280K valued), then with the renovations I should be able to bring that up to around 350K+. And with my 50k deposit I will only have a 200K loan and 150K in equity.
I know my idea may have flaws and thigns to consider, but in the years to come before i get in(hopefully less than 3) they will all be cleaned up so when i begin it’ll be all good.Christopher.
Originally posted by alotti:Doesn’t all property become positive eventually & can’t you speed up the process by doing the following?
Probably. But if you bought a property yielding 3% (fairly ‘normal’ ATM), and increased rent by 4%pa, it would take 25 years to become CF+ (assuming 8% interest rates).
F.[cowboy2]
Thanks guys.
Dr X, I saw your article in this month’s API, impressive [exhappy]
Foundation, you sure are subtle [blink] something for me to think about…
Hi, alotti
True about what you said. Eventually, a CF- property can become CF+. The main issue is how long are you willing to wait, and how much money are you willing to fork out from your own income?
Even if you have a large disposable income, there is a limit to the number of CF- properties you can eventually hold. There is also a lilmit to how much tax deduction you can make. When your taxes paid runs out…
Depends on your objectives. If you earn a large income, am willing to work for many more years to pay off your IPs, that is fine. Eventually, those IPs will go CF+. If you are looking to slow down and take it easy from work for other more important matters much sooner, then using cash inflow from CF+ properties is the way to go.
Cheers
Daniel [specs]
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