Positive Gearing.....

Remember with income comes tax, with CG there is no tax until you sell, drawing out equity doesn't cause tax can actually make you pay less tax (depending on purpose).

CF = Serviceability, sustain
CG = Profit

You need CF (either yourself NG or from the property CF+) to get to the CG (profit).

Earning $1,000 at the end of the year in CF but not achieving significant CG will not help you purchase another property or retire.

Same with losing $1,000 a year and getting huge gains if you hit the serviceability wall you will find it difficult to get a loan for another property until the CF situation improves.

Each is up to them depending on their risk profile and how hands on they want to be for the slow and steady lazy investor on a decent income you will look for NG properties and buy a property every couple of years but they will be better situated properties that have less risk and achieve nice CG.

The more hands on wanting to buy a property every couple of years (or less), will be needing more CF to help sustain the debt they will be taking out.

I work off a general rule that properties bought at FMV should yield 10% or more to be worth it . This can be 2% yield 8% GC to 9% yield 1% GC and other combinations. Myself personally I aim for 3-5yeild with 5-7 growth. You are able to achieve more than 10% (also less) but this is a general rule of thumb..

So if you are achieving 17% rental yield there will be little capital gains made and have a higher risk of going backwards (thinking mining towns) same on the development sites which you might achieve 17% gain but you are getting zero rent (unless you are selling advertising) as you are building.

If you can achieve 17% CG & 17% yield you wouldn't be on the site and be buy a sheet ton more.

 

I agree with your 10% rule although you cant fully predict year-on-year CG. I would hate to negatively gear a property only to end up making a capital loss as well.

 

Read the actual article and sounds impressive 6 properties in 2 years after selling their house.

However read the fine print, extract below;

His example assumes a three-year fixed rate mortgage with an interest rate of 4.19 per cent for a property with a purchase price of $220,000.

It assumes a loan-to-valuation ratio of 90 per cent, meaning the investor puts down a deposit of $22,000.

With the assumption they purchase $220,000 (1.32M for 6) properties at 90% LVR that is total outlay of $132,000 for six properties. Which PM archieved 3.8% CG last year or $50,160.

Further look at CF;

Assuming the mortgage interest rate is constant over a 25-year loan term, the monthly principal and interest repayment is $1066, of which $375 is repayment of principal.

Lee is assuming a weekly rent of $290 a week, or $1257 a month, which makes it likely the investment – even after insurance, council rates, water and strata levies and real estate agent fees

$1,275 less mortgage $1,066 is $191 positive or $2,292 p.a but you have all those expenses that they mentioned, lets call it 1k positive (being generous as the agent would be close to 1k p.a.) so for 6 properties you are 6k or total 56k up.

Compared to Sydney (picking it as PM would of seen people move from Syd + the flow on effect). As I don't know Sydney that well I picked Bankstown as I know it isn't the best suburb but it also isn't the worst in terms of reputation. Median price 2014 - 750k and achieved 17% growth to median 2015 880k or (130k CG), lets say it was 30k NG you are steal better by 5k for the same amount.

 

Who would have thought - limited reasons against making money?

Fundamentally there isn't any tangible benefit of negative - it's just something that in most cases may be required due to property cost vs rents. It's a cost mitigant, not a strategy to strive for in and of itself.

 

This is the key point...

There are only two legitimate reasons to negatively gear a property.

The first is because it's not possible to buy in the area that you want without using it, aka you're forced to lose money in the short term for a long term gain and you may as well let the government subsidise this as long as they're willing and you need it.

The second is if it's a result of non-cash "expenses" (Depreciation basically) that pushes a cash flow positive property into a negatively geared property for taxation purposes.

If you're negatively geared for any other reason, you're just losing money for the sake of it. Paying 50% tax on a dollar earned is better than saving 50% tax for a dollar spent, always.

 

Yep positive gearing is working for me. 4 properties with granny flats in Sydney. $1000 plus per week after all costs including insuranve, repairs etc. Over $1m in capital gain as I got in before the boom.

Have quit my job and now having a mini retirement. Wife is still working though

 

I base it on borrowing everything including legals , stamp duty etc .

We've bought a few cheapies over the last year . doing summaries last couple of days . only one is actually running positive , by about 30 dollars so far

Purchase price 199 ( Ipswich ) , rent 270 . all you need is a stove to break , drain to block etc and that another 1 - 2 k and you're negative .

We always find things go wrong with properties in the first year as things the previous owner didn't fix , get fixed up . After a year or so the repairs slow and the cash flow stabilizes.

Cliff

 

I'm trying to understand this better and I'll use an example:

Property cost: 545K
Rental :560/wk, 29,120/yr or 28,246 after agent fees
Rates/ins/etc: 3,000/yr
Interest: 23,162

So 28246 - 23162 - 3000 = 2084.
So in simple terms (not including depreciation/tax, etc) the property is $2084 cash flow positive? Does that mean it is positively geared?

 

That is cash flow positive before tax. What are the non-cash deductions such as depreciation etc?

Assume depreciation is $4000, that would create a taxable loss $1916

If you were on the 37% tax bracket it would result in a tax saving of $709.

So after tax cash flow would be $2,793

 

I'm negatively geared and cash flow positive on 4 of my properties