Positive gearing... What am I missing here?

Discussion in 'Investment Strategy' started by sanpellegrino, 25th Nov, 2019.

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  1. sanpellegrino

    sanpellegrino Member

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    Hi guys... Big time property investment newbie here with a possibly stupid question.

    I understand the benefits of positive gearing when it comes to tax writeoffs and investing primarily for capital gains.

    But what about positive gearing? With many investor loans hovering around the low-mid 3% and returns from term deposits, etc. being so poor, why aren't more people positive gearing?

    Granted, it's not super easy getting a rental yield over 4% on houses in decent areas, but there are loads of units out there with yields in desirable locations with a yield over 5%. Even after accounting for strata fees, management fees, vacancies / repairs, etc., it seems pretty doable to be cashflow positive if you have more than a 20% deposit to put down.

    Am I missing something here? If not, why aren't more people doing this?
     
  2. thatbum

    thatbum Well-Known Member

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    ...maybe they are?

    I don't understand what your exact point is though. Whether someone is positively or negatively geared is simply a net totalling of their investment income and expenses. Sometimes its negative (especially if they borrowed heavily), and sometimes its positive.

    What is there to read into here?
     
  3. Peter_Tersteeg

    Peter_Tersteeg Mortgage Broker Business Member

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    Everyone wants to do it, very few people achieve it. You're not really missing anything other than positive geared properties aren't as easy to find as you might think.

    An interest only loan would be about 4%. By the time you add on all the holding costs, that becomes about 6%.

    Then consider that the rental yield in Melbourne is about 3%, some locations might be about 5% (not many decent locations are though). Even with record low rates, the property is negatively geared.

    I've had a lot of first time investors come to be saying that their strategy will be to buy cash flow positive properties. Some even buy something believing it to be cash flow positive. Market reality is usually something different though.
     
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  4. sanpellegrino

    sanpellegrino Member

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    Peter, what do you mean about 'holding costs'? Like strata, repairs, etc.?

    And there are I + P 30 year loans for 3.2% unless I am misunderstanding?
     
  5. Peter_Tersteeg

    Peter_Tersteeg Mortgage Broker Business Member

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    Insurance, property management, maintenance, strata fees, council & water rates. Everything it costs you to hold the property from one year to the next.

    Consider a property that you've done the math on and it puts $100 into your pocket every month. Then the hot water service explodes and costs you $2k to replace. There goes your positive cash flow.

    Are you quoting at owner occupier or investment rates?
     
  6. MTR

    MTR Well-Known Member

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    You are quoting 4-5% gross, its not net massive difference. Hard to find true positive cashflowing properties
    You need to deduct all costs from rent and you also need to include stamp duty
     
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  7. sanpellegrino

    sanpellegrino Member

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    Last edited by a moderator: 25th Nov, 2019
  8. My House QLD

    My House QLD Well-Known Member

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    7%+ available in parts of Brisbane on houses. Not that easy to find but they do pop up occasionally.
     
  9. Sackie

    Sackie Well-known cafe bum of the East Premium Member

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    I dont know too many people in Australia who have retired on a great income from only positive CF residential real estate. The reality is yeilds are generally terrible. And when yeilds are slightly better... you need to take a long and hard look at the value/growth potential of the underlying asset. Just my 2 cents.
     
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  10. The Y-man

    The Y-man Moderator Staff Member

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    Be very careful - they can (and do) jack it up any time at will.
    Also, you may not qualify for serviceability etc.

    The Y-man
     
  11. euro73

    euro73 Well-Known Member Business Member

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    Positive gearing and positive cashflow are two different things .
     
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  12. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Think of it this way
    - the higher the rent the better as it is more income.
    - but you don't want this as the expense of capital gains
    - whether it is positve or negative doesn't necessarily mean it is a good or bad investment.
     
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  13. Bender12

    Bender12 Well-Known Member

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    Op is talking about positive gearing but most posts above are talking about positive cash flow.

    Maybe not many people doing it as you can't deduct as much anymore? The rules changed a couple of years ago, can't remember it exactly but something along the lines of you can't depreciate plant and equipment anymore if you didn't pay for it yourself.
     
  14. croseks

    croseks Well-Known Member

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    To be frank, I think you are looking at investing the wrong way.

    What's the difference if the net cashflow at the end of the year is positive or negative? Maybe a few hundred to a few thousand dollars.

    What's the difference if your (random number) $700K investment increases in value by 5-10%? $35k-70K

    Every good investment will turn cashflow positive over time. Not every cashflow positive investment will turn out to be a good one.
     
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  15. Niche

    Niche Well-Known Member

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    Also something to keep in mind is that you are look at P&I loans with a 3.2% interest rate which you may be able to cover with rent but you still have to pay principal on top of that so your costs are not just 3.2%, they are 3.2% interest plus principal as well. You are also assuming that the property will be 100% occupied from day one which may not be the case. I hope I explained that in a way that makes sense :)
     
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  16. NHG

    NHG Well-Known Member

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    Hey @sanpellegrino

    As stated above, the question you asked isn't so simple.

    The simple answer is. *here comes a super long attempt at explaining*

    1. They aren't educated about it, and most choose to stay ignorant.

    Most people place investing in the too hard pile.
    Make statements such as "who has time for that".
    Do things like work 40+ hrs a week doing things they don't like because, "who has time for that".
    Place their savings (if any) in the hands of financial planners, buying OTP property.
    For the most part, never genuinely toy with the idea of being financially free.

    Another less likely scenario which does occur, is they are gun business people, or investors in another field, and don't care too much about high returns on property as it is a side-gig per se.
    I have a handful of friends that make 7 figures through various ventures. Putting their brain power towards real estate detracts from kicking butt in that primary venture.

    2. They THINK they are educated about it, but are ignorant.

    I would put most 'positive gear' investors in to this category.
    As above, adding 2% to the interest rate will roughly cover non major expenses.

    Say interest rate is currently 4%. Add 2%, then you need to make more than 6% return to break-even.

    Now:
    a.

    Buying a place for $280k, renting for $320/week. Well...
    $280,000 * 1.05 (purchasing costs) = $294,000
    $294,000 * 6% = $17,640
    $320/week rent = $16,640
    Profit = minus $1,000

    So expenses are higher than the rent. Still negative geared when comparing apples to apples.

    Okay what about a larger spread. Does this account for major repairs such as roof, hot water, having to renovate to keep home rentable every 10-20 years? Doubtful. Shout-out to @kierank for educating me on this.

    Say the home is perfect and doesn't need maintenance. Okay so you're positive geared $5k/year per property. At property 3 your probably capped out.

    Yay you, you have $15k positive cashflow until the market does the heavy lifting for you, in maybe 10, 20? years. This is where I am a bit militant in pushing for active-investing vs passive-investing.

    b.
    Paying down the loan with a 20% deposit as per your example, is not comparing apples with apples. Everybody eventually has positive geared property if they are P+I and don't ravage it through refinancing. However this requires both TIME and/or SAVINGS which is like trying to suck a thick shake quickly through a tiny tiny straw. It is a slooooow process.

    This is why most investors don't enjoy the fruits of property investing at a reasonable age, if at all.
    The idea of plucking positive geared properties everywhere (and being able to continuously service them) is a bit of a lie sold on many a book-store financial shelf.

    3. They DO do it, do it well, and slaughter the game of property investing.
    This takes serious skill, and ability. Long hours of trial and error, and diving deep into the world of property investing.

    Examples:

    a.
    2015, a friend purchased a property in Sydney North-Shore for $1M. They chopped up this monstrous house into 3 (legally). They were renting the house and pocketing an additional $50k above ALL expenses based on 105% of purchase price and rents.

    b. 2019, another friend purchased a property in Perth. Owner was having trouble selling. Friend asked the owner to front the 20% deposit, and an additional $70k for renovations. Property is positive geared by at least $25k at 105% of purchase price. This is a no money down deal.

    c. 2016? Same friend as above. She's a NMD specialist really. Purchased a property in rural NSW on a 20 month delayed settlement. Renovated the units, used the uplift price to purchase the property. Property is positive geared as there are 8 units on the block, and she bought it for chump change.

    d. 2018 mentor purchased property in South-West Sydney. 2 properties side by side. 4 rentals on the blocks. Positive geared by only a little bit, like $3k. However this was a development site for 10 houses. So the game was only to cover holding costs whilst he got the DA together.

    One can argue the build 4, sell 3, keep 1 investment is also positive geared / cash-flow positive. However it's really selling down assets to pay down the debt on the main house. However that's probably the guys I've met who have truly built crazy portfolios over a 20 year time-period.

    Yes 20, property ain't no get-rich-quick-scheme.

    Hope that answers some questions.
    NHG.
     
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  17. Trainee

    Trainee Well-Known Member

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    If you want cashflow, shares are more liquid and simpler.
     
  18. Kelvin Cunnington

    Kelvin Cunnington Well-Known Member

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    Yes; a TD takes 5 minutes to do (unless the queue at the Bank is a mile long).
    A property takes weeks and months to do, and there is a much higher perceived (and real) risk.
    This is why most dont do it.
     
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  19. sanpellegrino

    sanpellegrino Member

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    Thanks guys, some great replies in here... I see that true positive gearing is much harder than it first seemed.
     
  20. Trainee

    Trainee Well-Known Member

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    the question is whether its even desirable for residential ips. If you get lower capital growth, might as well buy shares with lower gearing.
     

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