Positively or neutral geared property

We are about to sign a contract for a house and land package on the Sunshine Coast. The house and land cost is about $550 000 tops. We are borrowing the whole amount. The rest is expected to be about $550 p/w possibly more.
The repayments will be about $500 p/w which makes the property neutral or even positively geared.
I was just wondering what the benefits of having this kind of property are?
Should we try and make it negatively geared? Is that even possible?

 

The difference between negative gearing and positive gearing is making a loss (negative gearing) and making a profit (positive gearing) on the rental income after costs are taken into account.

IMO making investment decisions for tax purposes isn't good investment strategy, but if the property is positive geared, it's putting money in your pocket. This is a good thing and is probably why you're doing this in the first place.

 

Something you probably should have considered prior to buying it?

Depends what your long term investment goals are, are you in it for capital growth or cashflow or something else? Note capital growth and cashflow are not always mutually exclusive but with brand new house and land stock in QLD it is really rare to have both.

The rental estimate - where did that come from? Was it on the bank valuation or just an estimate given by the person selling you the property?
Depending on where you bought, this may or may not be achievable rent long term, so it might even become negatively geared as more houses are built around yours, giving renters more choice, causing owners to drop rents to secure tenants.

Positively geared property is great if rent is paying the loan down and covering the expenses to hold the property (ie. rates) It's essentially costing you nothing to hold, your lifestyle doesn't have to change to have the investment. The trade off may be that you don't get the 'tax benefits' of say a negatively geared property however buying a brand new property just for tax benefits is purely spruiker talk and shouldn't be used to make an investment decision. they'll typically try to get you to buy brand new House and Land - don't worry about the property itself "just look how much tax you're getting back each year!"

 

On those figures I wouldn't worry about trying to "make" it negatively geared - once you include rates, insurance, management fees, etc, etc, etc, it will be negative, or close to.

 

Before signing the contract:
- have you checked sales of properties in that estate or close by to ensure you are not paying too much? H and L packages can be overpriced. Is landscaping, driveway, fencing, alfresco area, washing line,(and concrete underneath) included? You may need to factor in theses costs.
- who “sold” you the package? Was it a company or did you go straight to the builder. If a company, how do they get paid? Are they getting kickbacks for on selling to you? - which means you may be paying too much for the package.
- have you got a rental estimate from an independent property manager?
- you will have rates, insurance, PM fees, water charges and repairs and maintenance - around 6k per annum in expenses, plus the interest on the loan. Once you add all this up then see if you are “cashflow” positive or negative- probably negative
- you will have some on paper depreciation benefits - you can do a depreciation estimation on the BMT website.
Benefits of owning a brand new property:
- appealing to tenants , might get a bit more rent (for the first year)
- good depreciation benefits - helps with end cashflow position
- often less maintenance if built well but can be more maintenance headaches if dodgy build
negatives:
- what are holding costs when it’s getting built?
- could pay too much (likely)
- could be a dodgy builder
- could be too much land in that area therefore suppressing prices for quite a while
- area not developed eg schools, shops , transport, trees, parks etc
- could have empty block next door and someone builds a monstrosity or just never builds and it looks ugly
- could get ripped off by spruiker - builder could go bust
i have been there (bought land and engaged a builder for an IP) - but it’s not worth the hassle. Would rather just buy established, less hassle, less risk and more upside IMO.

 

Summary of above:
If the rental estimate is correct you will likely have;
-Negatively geared after depreciation claims
-Cash flow positive (low I/r’s and tax refund)
-Concerns over future capital growth prospects & the purchase price

Good luck