+CF properties

Don’t confuse POSITIVE CASHFLOW with POSITIVE GEARING. It sounds from your post like you are looking for pos GEARING?

These are two totally different things. I have posted on this before, but will attempt to explain again.

POSITIVE GEARING is when the rent covers the TOTAL COSTS BEFORE TAX of holding the property. There is a profit, so the investor has to pay tax on this profit. These properties are almost impossible to find in Aus these days, and if so, they are probably in an area that you should not invest in.

POSITIVE CASHFLOW is when the the rent does not cover the holding costs of the property. It is a negatively geared property intially, but when the ‘on paper’ deductions together with the the normal tax deductions for the holding costs are applied to the investor’s taxable income, the resulting tax return brings in more cashflow. The end result is that AFTER TAX, the property has a positive cashflow.

Speaking for myself, this is all I buy. My properties cost me nothing out of my pocket, and I pay no tax on them (legally).

Yes, they are harder to find than they were a few years ago, but they are still out there. One of the critical factors is the property must have a building/residence which was constructed AFTER 1987 to maximise the ‘special building write-off’. A Depreciation Schedule is a must with this strategy, so that the on-paper deductions can be maximised. Many investors don’t have this and cost themselves potentially thousands of dollars every year in lost tax refunds.

Ideally, something built about 5-10 years ago is good (but not critical) as there are still many years of depreciation left on the building and fixtures, but there is a good chance that these properties are almost ready for some ‘value adding’, thus you can buy and increase the value and rent return almost immediately, while enjoying the maximised tax returns to improve the cashflow.

You will find it very difficult to locate these properties in major cities and metro areas as the rent returns in these areas are usually too low. You need to look to regional areas, satellite towns and bigger country towns.

Finally, to maximise your investment, you should look to buy properties in potential cap growth areas which are near all amenities and with some land content.

Margaret’s books will explain this strategy very well. I have been a fan of hers for several years.

Cheers,
Marc.
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“we get sent lemons; it’s up to us to make lemonade”

Hi Ritchie,
first; my disclaimer (isn’t the whole world based on these now??) I am so sick of hearing these now – they are on almost every ad on tv and radio over here. [grrr]

I am not an accountant, so don’t quote me to the lawyer when I get sued (just joking!) I’ll attempt to answer those questions for you:-

1. That’s correct; the A.T.O (or maybe the govt?) made a ruling that you can claim the depreciation on the building as of September, 1987 (I think), at 2.5% per year for 40 years.

2. With the special building write-off, the allowable deduction runs out after 40 years from the construction date, so if you buy now, you have 20 years left roughly. This should not really be a concern as you would hope that after 20 years of investing you would be so wealthy it would not be an issue. The good thing about the S.B.W-O is it is the same amount each year – 2.5% of the construction cost.

3. The fixtures and fittings have different rates of depreciation. For example, the carpet has a life span of about 5 years (I think) in the eyes of the A.T.O, while the kitchen cupboards will last much longer – I think their lifespan is about 20 years.

4. That is correct, value adding is not a normal deduction such as a plumbing repair. It is a deductible depreciation claim like the S.B.W-O and needs to be included in your Depreciation Schedule, or give all the receipts/costs of the value adding, which is called a capital addition, or improvement, to the accountant so they can apply these costs to your tax return.

The important thing to do with all of the above, and any I.P you buy, is to get a Depreciation Schedule prepared by a Quantity Surveyor. This is a cost of about $400-500 (which is tax deductible). He/She will include every item, each will have a ‘life’ for depreciation and then this schedule gets handed over to your accountant. The accountant will use the depreciation schedule for your tax return each year.

I suggest ring a few Q.S’s, and talk to your accountant about a plan of attack.

Cheers,
Marc.
[email protected]

“we get sent lemons; it’s up to us to make lemonade”

Hi Marc

I’m a newby so if what I say is incorrect or doesn’t make sense I hope u wouldn’t mind.

I’ve read Steve’s books very recently, and from what i gathered, his definition of positive cash flow properties sounds a lot like ur positively geared property definition, and what you call positive cash flow property sounds more like a negatively geared property by Steve’s definition.

Doesn’t a positive cash flow property need to make money from day one instead of through tax refund?

confused…….

I am pretty sure the explanation for Steve’s term for Positive Cashflow is the same as Positive gearing.

You are right about my definition of the term Positive Cashflow – it is neg geared at first, but becomes positive cashflow after tax refund. Either way, the property doesn’t cost you any money from your pocket.

The critical difference between Steve’s explanation and mine is:-
– with Steve’s pos cashflow you have to pay tax as you have made a gross (before tax) profit.
– with my explanation you have a tax refund as the property is initially making a loss, but after you receive your tax refund the property is making a nett (after tax refund) profit.

The other thing with my definition is that you can actually arrange with the A.T.O (your accountant will organise it) to receive your tax refund every week instead of at the end of the financial year, so you get your positive cashflow as you go – tax free!

Many people shouldn’t do this though as they would be tempted to spend that pos cashflow on ‘doodads’.
What should be done of course is invest the tax refund back into the I.P or into more I.P’s.

Cheers,
Marc.
[email protected]

“we get sent lemons; it’s up to us to make lemonade”

Thanks Marc for your clarification

I’ve recently picked up a book by Margaret Lomas and realised Steve’s def. is a little flawed

As for DaveA, you need to know the purchase price, rent return as well as the possible on-paper deductions u will be entitled to to work out if the property will be +ve CF. There’s a calculator on the website http://www.destiny.net.au to help u with all of that. I’m just about to check it out myself

Hope it’s useful!![laughing]