Buying Negative AND Positive Geared properties at the same time?

Hi all,

I have a colleague who advised he goes with the method of getting 3-4 negative geared properties for every 1 positive geared property.

Im not sure why this strategy would work. Either someone wants tax concessions with negative geared or is either working and has to pay tax on positive geared properties or is simply not working and relying on positive geared for income.

Can anyone explain if there are any benefits for purchases a couple of negative geared and positive geared for their portfolio?

 

It might work from a tax and investment perspective depending on your financial circumstances.

It won't help you qualify for more debt with lenders though. Even a positive geared property will have a significant negative impact on your borrowing power due to the conservative way lenders assess affordability.

 

So how would it help from a tax perspective?

 

I have asked around about this also. The three answers I found were

1. It is based on the lending criteria from yesteryear where you could just keep buying more and more properties, so you could get say 10 properties with 3 positively geared to pay a bunch of the others. Currently with the new lending rules, you can get to 10 properties when hell freezes over (or when you have a godly income). So this way is out for over 99% of people.

2. You can try it with some property out in the sticks that will have no growth, but the costs are so high from lack of growth plus not being able to leverage into enough growth properties and therefore forgoing so much of your growth that it is defeating the bigger goal of growing your wealth.

3. If you want to get something positively geared without throwing growth right out the window, you need to have an actual strategy to do so, for instance, splitter blocks in the major capitals, bought within a few years before a boom when yield is on the way up instead of near the bottum and as the boom comes and goes rent increases - and even though yield on NEW purchases goes down, your cash on an already bought property will go up (if you don't understand that, read it again). You can then put multiple houses on a reasonably well located piece of land to drive the income up further (check the zoning before purchasing and also this requires development so not for everyone). You will still get a bit lower growth than the one house on the original piece of land because you have increased the proportion of the depreciating assets, but it should still do fine if it is reasonably well located in one of the major cities and would have a fair chance of being quite positively geared if you do it right.

In summary, it appears to be a strategy of the past which may return a long way into future, but is not really viable today unfortunately. Although I have seen people on here still mention it but then don't back up how it could be done in today lending & housing markets.

 

I invest in properties that are simultaneously negatively geared ( pre tax) and CF+ (after tax)

 

Can you elaborate please?

 

I can't see any synergistic reasons for your colleague's strategy.

If that's the mix he or she wants to have in their portfolio that's fine, but otherwise I can't see why there's any special advantage from having that mix over any other net gearing position.

 

Read my posts

 

Did he say this was driven by tax? Maybe this is a diversification strategy, buying some strong CG prospect negative geared properties with some CF+ to keep the whole portfolio neutral. I can't understand buying 1 CF+ property to multiple NG properties, that wouldn't get you very far, perhaps the other way round, a few cheapies and one blue chip?

 

There was an advertised strategy some time ago along these lines.

From memory it was called the Four pillars strategy. You bought 3 positively geared properties which then supported 1 negatively geared property. Or was it the other way around?? Can’t remember!
Marg

 

I basically do this but with some context. I have always hunted for property that keeps my portfolio in a cash flow sweet spot, but not necessarily property by property. What people often don't realise is that there is no such thing as a positive or negatively geared property. Gearing is simply a tax outcome based on a number of variables. You could essentially make the exact same property positively or negatively geared depending on how and why you're playing with those variables.

The other thing to note is that provided you're buying in the same structure - and most people use their own names - the addition of further property then must be viewed in the context of the whole portfolio in relation to its gearing outcome. You cannot and should not just work out the numbers on a given prospective purchase as though it was your first property and is stand alone. This is because the tax/gearing outcome of the previous property affects the gearing and tax outcome of the next purchase and so on. This means that when you look at buying a new property, you must add up all income and expenses and work that out against the entity's total income to derive its cash flow. On a very simple level, this means that if you have a negative cash flow on your first property you may then look to balance it out with a positive cash flow down the line. Why do people do it?

1. It balances risk. If you keep your portfolio's cash flow at a spot that you are personally comfortable with, it reduces your exposure on a cash flow basis. No one ever went broke from having too much debt. They go broke from failing to manage the cash flow on the debt.

2. It might not increase borrowing capacity, but it upholds it. Despite some points above saying lenders won't take it into account, and while I can see what they're saying in isolation, it's not necessarily true. Yes, banks will not take into account high yield on face value i.e. they will take a percentage of the rent (50%-80% depending on the lender) or a yield value (usually 6%), whichever is lower. Firstly, this is cyclical and in the current market it is absolutely true, however policy ebs and flows. Secondly, this must be viewed in the context that if your yield across the portfolio is lower, it reduces your borrowing capacity more than having a higher yield portfolio. If you 'balance' your portfolio's cash flow, you will still have a higher borrowing capacity than someone who just focuses on growth and is happy to accept yields of 2-3%.

3. Due to above, you are then possibly able to push your borrowing capacity further to leverage into more property than you otherwise would have and have a higher absolute value overall.