Hi I am new to the whole property investing game and after reading Margaret Lomas and Steve McKnight's books am keen on the concept of positive gearing.
BUT WHAT IS POSITIVE GEARING????
Loosely it is seems to be defined as where income is greater than costs, but hey if I borrow 80% using the IP as security then fund the other 20% then I have borrowed 105% total. That becomes very hard to find property that covers the interest and management costs on that.
One author seemed to suggest positive gearing is only the bit against the 80% loan. So what happens to servicing the other 20%? And how does one then get into that enviable position that I would like to be in of being able to buy a whole heap of houses if the rents do not totally cover the whole 105%????
Basicly if you buy a house for $100,000 and you pay $7,000 pa in interest and $2,000 in rates and insurance and allow $1,000 for maintanance which totals $10,000 per year and your property returns you $12,000 per year, then you are positivly geared but if the property only returns you $5,000 per year then you are negativly geared, if it returns $10,000 per year then you are neutraly geared.
Now the author that says you only use the bit against the loan is incorrect, that is a stupid way to look at it, because if you have 40% mortgage you don't want to be only looking at a return of $4,000
when I buy a property it must return me 100% of the purchase price and all other costs involved, stamp duty renovations etc
your money is also worth something, so you need to get a return from it.Yes that's what I thought too. But how many properties are out there getting 12%?
Postive is allowing ALL cost against all income. I too disagree with that author.
Some marketing / website do the same. offer 'Positive Cash Flow' properties and in small print "based on a 20% deposit" this too is rubbish.
there are many properties out there that are (after all cost including borrowings) still cash flow positive. try this site: http://searchinvestmentproperties.com.au/
Hope this helps.
Anthony
I believe that technically, positive gearing is when the income is greater than the expense(implies you have borrowed, when you use the term gearing). The income is taxed. If you make a substantial cash deposit, you would likely have this situation.
Positive Cash Flow or CF+ as it is referred to sometimes, is when your rental income plus your tax breaks(maximising your depreciation) is greater than all your outgoings. A high tax bracket and a relatively new, or renovated property may help to make this feasible.
does this help?
Snoopy II wrote:Positive Cash Flow or CF+ as it is referred to sometimes, is when your rental income plus your tax breaks(maximising your depreciation) is greater than all your outgoings. A high tax bracket and a relatively new, or renovated property may help to make this feasible. does this help?This touches on my problem. We have 2 IP's in my wife's name, both very CF+ as per you guys definitions above, but she has no other income due to staying at home woith kids, so deductions are not very effective if you hardly pay any tax anyway. We don't want to buy further CF+ IPs in my name (already in upper tax bracket) as it will just bump up my income further and any income will just disappear in tax.
So do we bite the bullet and go for positive geared in my name and pay heaps of tax or in my wife's name and lose a lot of the depreciation benefits?
Or just go negative geared in my name like everybody else and keep our fingers crossed there's capital gain? (I really like the fact with positive gearing that you can know the figures beforehand and not have to rely of speculative capital growth.)
Thoughts anybody?
House Call wrote:We don't want to buy further CF+ IPs in my name (already in upper tax bracket) as it will just bump up my income further and any income will just disappear in tax.So do we bite the bullet and go for positive geared in my name and pay heaps of tax or in my wife's name and lose a lot of the depreciation benefits?
House Call, that is the dumbest thing I have every heard. So as a property "invester", haha, you would be prepared to loose money rather than make money. The ultimate goal of the majority of property investors to find positively geared properties, and eventually turn negatively geared property into positive (rent increase, etc).
Not sure what you trying to achieve with LOOSING money deliberately to save tax. Let me break it down for you with a calculation.
Assume you are negatively geared $15000/yr. At the tax bracket up to $180K, you get 40% back in refund, so you are spending $9000 of your OWN money. So the value of your home needs to go up $9000, just to break even. Otherwise, you are loosing money on your "investment".
Now assume you are positively geared $15000/yr. You pay $6000 extra tax, but have made $9000 profit.
I often find it interesting why someone deliberately looses $1, to get back $0.40 is tax refund.
Negative gearing is good in a rising market. Negative gearing is a poor investment in flat and falling markets.
For me, I'll go with the ultimate goal of most investers, and aim eventually for positively geared. Personally, I would LOVE to be in a position where I pay $1million in tax for property (it means that I'm earning $2.5million/yr)
House Call, that is the dumbest thing I have every heard. So as a property "invester", haha, you would be prepared to loose money rather than make money. The ultimate goal of the majority of property investors to find positively geared properties, and eventually turn negatively geared property into positive (rent increase, etc).
[/quote]That's a bit strong, investor888. I mean the "dumbest" bit. I don't think you read what I wrote. (The rest of what you wrote was excellent).
I am very keen to positive gear and totally agree with you about the pointless nature of negative gearing. ( which came out very strongly in both those books I mentioned at the start of this thread.
My dilemna was more in whose name to put a new (positively geared) IP, my wife's (low income) or mine (high income in the light of depreciation and tax considerations. (And it is a dilemna because I don't want to lose money to save tax. )
Woops that last entry didn't come out right. I was quoting this:
Investor888 wrote:House Call, that is the dumbest thing I have every heard. So as a property "invester", haha, you would be prepared to loose money rather than make money. The ultimate goal of the majority of property investors to find positively geared properties, and eventually turn negatively geared property into positive (rent increase, etc).If you bought the property using a family trust wouldn't this allow you to further distribute the cash flow to assist with tax ?
Eg. Your children can each earn $6000 from the property before they pay any tax…
Nb. I am defiantly not an expert in this area, so not sure what implications this would have when selling the property, asset protection etc… best seeking good accountant / legal advice.
House Call, you are very lucky if you already have 2IP’s which are positively geared (is this what you meant – you are making money, cash in hand?)
I thought from your original question that you were just starting and so on? I am a bit confused.If you can go out there and buy more positively geared properties in your wife’s name, maybe you should just keep doing it. Just let us all know where you are finding these?
It seems to me to make sense to put these properties in your wife’s name if that is truly your situation. (Or indeed, investigate a trust option)We are looking for CF+, where we will make full advantage of my partner’s higher tax %. We will not PAY tax on this in his name, because our expenses might be higher than the income ie by say $5000, but when ,we use our on-paper deductions, maybe $8500, the loss on the higher earner’s tax return becomes a $13500.00 loss, which converts to a refund of $5130.00 (@38%). This is what we are looking for, and that’s what I believe is meant by Cash flow Positve, as opposed to Positive Gearing.
I hope i haven’t misread your original question
Thanks for your comments Snoopy II and Matt. I will definitely ask our accountant re the trust side of things.
Snoopy the CF+ that you talk about, where you basically negatively gear but then use on paper depreciation deductions to create a CF+ situation. You sound like you have essentially decided that it is better to invest in higher income earner's name to get the tax benefits. That would only work with newish places, wouldn't it? I like that concept though, but you would not want to pay off too much loan or you would end up positive gearing in the high income earners name and pay more tax. (whereas if you bought in the lower earner's name you would not get such good tax breaks early on but as you paid off more you would pay less tax on the income it generated as you became more positively geared)
The original question was what exactly is positive gearing, and consensus seems to be that it is when total income exceeds total outlay on the whole 100% cost price of the IP (+ purchase costs)
Those 2 IPs we already have. One is a business premises that we were kind of forced to buy a few years back when a business partner left, but so much is paid off now that it is very CF+ due to rent of other occupants. (all sort of accidentally started us on a good investment track) The other one we recently bought in a QLD mining town with rental yield of over 10%. But since that one we haven't found anything even close to as high as that yield and we are not really willing to put lots of eggs in the mining town baskets.
Hey, if i could find a PG property that wasn’t mining town, we i would definitely buy it in my name, or do a trust. Just not confident enough to buy in those areas at the moment.
You have started to pay off your capital on your IP’s? Good for you if you already own your own PPOR outright. We are still working on ours, so our investment loan is interest only.
You are right, It is better for the depreciation the newer the better, but it doesn’t have to be brand new to get a good depr, I believe a renovated place would also get you a good claim, and there are probably other considerations or variables.
The thing is, for us, better to have CF+ than nothing at all. Not interesed in a big negative gear as it will handcuff us for future borrowing.
The other thing is yes, you do have to think longer term and what your goals are. Putting just in the higher earner’s name means you have to think about what that will mean when and if you go to sell – ie you make a Capital Gain and you will pay more tax then ( also the more deprciation you claim, the lower your cost base to reduce your Capital gain). And as you said when it turns around and becomes positive gear, you have considerations there. Most of the ones we are investigating look like they are several years off a true PG.
So there are many variables for sure, to consider and I think our strategy will develop as we go along.
It seems to me to make sense to put these properties in your wife’s name if that is truly your situation. (Or indeed, investigate a trust option)You must be logged in to reply to this topic. If you don't have an account, you can register here.
