Positive Gearing.....

This article talks about the benefits of Positive Gearing.
Something I am keen to do with my IP. The article makes it sound very 'positive' indeed

Any comments or pitfalls that the author hasn't pointed out (other than possible tax considerations)?

Switching gears on property investment

 

It is simply not as black and white as just buying all PG property and she'll be right, just as the opposite is true, buying all NG or NCF property and you'll realise endless amounts of CG.

I know people who have quite a few PCF and PG properties and in 8 years plus they have gotten no where, while collecting a small amount of profit each year. Also know others who bought all NG property and went no where too.

IMO you need to understand and take into account your:

Personal financial situation,
Goals
Personal strategy
Growth drivers
Property cycles
Buying well.
Risk profile


The whole simplification of 'buying positive, buying negative' skips a whole range of important factors/considerations that will have a significant impact on just how much cash flow you eventually, meaning in the consolidation phase will be able to produce, and will it be significant or not.


Just my opinion.

 

I read through the article...
And in other news
1+1=2

The article says - Everyone should buy in regional! Wooo!

In all seriousness, this is probably the only worthwhile comment in the article

 

On another note, nothing irritates me more than people who say they have a positively geared property and when you dig you explain its because they put down a 50% deposit.

They aren't lying, but the message they are trying to portray is simply skewed and adds zero value.

 

Am positively geared and works for me.

 

Agreed. I wish there was a consensus on the definition of positive gearing. Something like:

• 80% LVR
• All expenses considered
• Depreciation not accounted for

Otherwise you're not comparing apples to apples...

 

All positive here as we develop all our IP's in Sydney & Brisbane, and still get really good depreciation and other costs rebates.

 

For me I calculate it as follows:

Total Cost (Purchase Price + Stamp Duty + Legal + Disbursements + Renovations + Other), basically what i out laid to get the property up and running.

Gross Rental Income
Less Total Expenses (excluding interest) (includes Land Tax)
Less Interest (Total Cost x Interest Rate)

 

Mine are all positive.

1 started off as Negative years ago, built a granny flat (borrowed funds), made it positive.
1 started off as positive from day 210 instead of day 120 - because the builder took their time.

Depreciation is always a nice bonus.

 

There was an agreement back on Somersoft to always use 105% (full finance + related costs) LVR to calculate cashflow. This way you're also considering the cost of money coming from either equity account or offset account.

Happy for people to weigh in with expenses (which vary a bit per state, ie council rates and insurance are expensive in Brisbane compared to Adelaide), sans Depreciation for fairness (since everyone is on different tax rate).

 

I didnt get any rent from my tenants for 2 months or so, yet I've still made a profit over the 4 months ive owned the place and have doubled my equity by renovating. So yeah positive gearing is working for me so far.

 

yeah but if you see the properties they suggested as "high positive" geared in vic are like in the country mildura, bendigo, ballarat. and the suggestion that negative geared is for the odinary . in today's climate with a 20% deposit - i would not think there would be many places in vic that will be positive. dun talk about places bought 5 years ago as prices were different.like now, it is like saying buying a house in werribee or buying a block of land with an existing house in say ringwood north. both can be developed, werribee being positive from day 1 and ringwood negative but the end result after the dev is gain is higher in ringwood north.

 

Both positive and negative gearing has worked well for me.

 

Steve McKnight's 1% rule is a quick way to work it out if it's close.

 

Can you please explain the 1% rule?

 

Steve McKnight basically says that you should try to yield 1% above your interest rate. For example if you're borrowing at 5.5% and yielding at 6.5% you'll probably break even considering other costs. It's pretty rough guide.

 

Thanks D.T. - you are a wealth of information (as is the whole Propertychat forum). I am learning lots

 

I was not part of any agreement, but this is how I calculate things It is the only thing that makes sense unless no non deductible debt and lot of cash under the bed....I guess.

 

Positive Geared ..I treat as
Interest (100pc of total purchase price) plus all other associated cost (not tax ) being less than the rental
Still possible ...just purchased a property at 6.4pc rental yield funding 4.16pc
Probably a long lease too ! (Like over my or your lifetime)

 

Use a positive geared to offset a negative geared? Costs nothing and still makes CG. All comes down to your Serviceability at the end of the day. CG is the end game but you can't go negative geared the whole way to get there.