All Topics / Help Needed! / How to turn negative gearing into positive gearing

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  • Profile photo of davidtsdavidts
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    @davidts
    Join Date: 2012
    Post Count: 16

    Hi all wonderful people,

    I am pretty new to property investing. However, I have a IP which I purchased 2 years ago for $440K, and an IO mortgage of $400K. The rental income does not cover the repayments, not by much, but that's ok as I am in the 40% income tax bracket and the negative gearing helps with my tax.

    I recently had the property valued and it came in at $500K. Now I have equity in it and I am thinking of taking the equity out to purchase maybe 1 or 2 very cheap IP, assuming I can borrow upto 90%.

    My question is, if I am forever leveraging off my IP to purchase more IP I will be forever negative gearing. How do I change this positive gearing so that I have CF+? Eventually I want to live off the CF+.

    Thanks.

    Profile photo of DerekDerek
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    @derek
    Join Date: 2004
    Post Count: 3,544
    davidts wrote:
    My question is, if I am forever leveraging off my IP to purchase more IP I will be forever negative gearing. How do I change this positive gearing so that I have CF+? Eventually I want to live off the CF+.Thanks.

    A couple of quick comments.

    Rents will rise at some stage in the future at which your existing property will become positive.

    If you purchase positively geared property or can make a property positive through improvements and increased rental returns you may find that your new properties are positive and positive to such an extent that they help offset any losses on your existing property.

    PS – good result on your existing IP in this market – a great launching pad to build upon your existing property

    Profile photo of TheFinanceShopTheFinanceShop
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    @thefinanceshop
    Join Date: 2012
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    Hi David,

    You can borrow up to 90% of the existing property value. Cash flow is very important as part of any investment strategy but please don't lose sight of the Capital Growth potential of a property. It sounds like you need a 5 and 10 year investment strategy plan. This way you can determine what type of properties you need to be chasing and in what price range. Purchasing a few cheap IP's may sound great from a cash flow perspective but there is point purchasing a property for $200k than will be worth $210k in 5 years times. Certainly not saying that this is the case with cheap properties but do your homework re the capital growth potential of a property as much as the cash flow.

    Regards

    Shahin

    TheFinanceShop | Elite Property Finance
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    Profile photo of Jamie MooreJamie Moore
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    @jamie-m
    Join Date: 2010
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    davidts wrote:

    I recently had the property valued and it came in at $500K. Now I have equity in it and I am thinking of taking the equity out to purchase maybe 1 or 2 very cheap IP, assuming I can borrow upto 90%.

    Hiya – depends on the lender but 90% is possible.

    davidts wrote:
    My question is, if I am forever leveraging off my IP to purchase more IP I will be forever negative gearing. How do I change this positive gearing so that I have CF+? Eventually I want to live off the CF+.

    Thanks.

    I wouldn't look it like that. If you're doing an equity release against IP 1 to fund IP 2 – then I'd assign the loan repayments for that equity release against IP 2 when determining the holding costs.

    Cheers

    Jamie

    Jamie Moore | Pass Go Home Loans Pty Ltd
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    Profile photo of davidtsdavidts
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    @davidts
    Join Date: 2012
    Post Count: 16

    Hi Jamie,

    Thanks for the comment. I am still a bit new to investing. Could you explain to me your comments below:

    I wouldn't look it like that. If you're doing an equity release against IP 1 to fund IP 2 – then I'd assign the loan repayments for that equity release against IP 2 when determining the holding costs. 

    David

    Profile photo of Richard TaylorRichard Taylor
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    @qlds007
    Join Date: 2003
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    Davidts, why not drop Jamie a line off forum and get him to sort it out for you.

    You certainly will be in good hands.

    Cheers

    Yours in Finance

    Richard Taylor | Australia's leading private lender

    Profile photo of thecrestthecrest
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    @thecrest
    Join Date: 2004
    Post Count: 992

    This is a good post thank you David, Jamie, Richard and all.

    Certainly most of those with negative gearing would like to change it to positive to enjoy that passive income and increase it.

    I suggest for the benefit of others equally new to investing or looking to improve their negative gearing position, that you post as much material on here as possible before going offline, or do both. 

    Good luck with a great outcome David.

    Cheers

    thecrest

    thecrest | Tony Neale - Statewide Motel Brokers
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    Profile photo of Paul DobsonPaul Dobson
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    @pauldobson
    Join Date: 2003
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    Hi David

    We use a slightly different method to live off our positive cash flow.  It revolves around 'vendor finance'.

    We started out buying properties and selling them with vendor finance, to create positive cash flow to support our buy and hold portfolio.  This gave us the result we wanted but ultimately the cash flow created from the vendor finance properties was sufficient to support our buy and hold portfolio and our lifestyle, i.e. we now live off it.

    If you do a search for vendor finance on the forum you'll find quite a lot of posts on the subject.

    Cheers,  Paul

    Paul Dobson | Vendor Finance Institute
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    An alternative way to finance your home.

    Profile photo of DerekDerek
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    @derek
    Join Date: 2004
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    Hi David,

    A comment that may be of some assistance to you.

    If your property is negatively geared then you may wish to consider completing a PAYG Withholding Tax Variation which when combined with a depreciation report (if relevant) may provide some short term cashflow relief.

    Your first post indicates your cashflow is 'OK' but you may wish to give some thought to to depreciation and PAYG tax variation if you haven't already.

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