Hi all,
I assume everyone here is pretty anti-negative gearing. So I put this scenario forward… What if you could buy a house and rent it, paying it off within 3 years by putting all the rent back into paying off the loan (as well as your wages). During the 3 years you would be losing money every week (i.e. rent > payment to bank+rental expenses). However after paying it off in 3 years, you would have a pretty steady income for as long as you owned the property (i.e. positive cash flow). And what if you then duplicated the process, i.e. acquiring more and more properties this way, to have more “pipelines”. Is this still considered to be negative gearing, because I am really more focused on the “pipelines” in the future years, not the tax deductions or the appreciation of the property.
Bris22
It doens’t matter what you call it, as long as it works.
If you did what you propose, it would only be negatively geared for a very short time. The interest would be decreasing rapidly as you pay it off, so your overall deductions would decrease resulting in the rent you receive being more than the deductions making it positively geared From a tax perspective). You will have to pay tax on this money then.
This is one strategy and works well, it is a very safe way of doing it. Imagine then when you buy your second property, you could put the rent from you first into that as well!!
However many people try to leverage more by buying as much as possible as soon as possible. For some stories look at that orange book by Jan Somers (has 101 investment stories with people using this and other strategies). Different things work for different people, go with what ever you are comfortable with.
Terry
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Hey Bris22,
I presently do something similar. I buy positive geared property and once the rest of my home loan (bad debt) is gone I will actively seek to reduce my good debtwhile increasing it at the same time…i.e. I will pay off each house and hopefully continue to buy more. So far if all goes to plan, my house will be paid off in 1.5 years and then the IP’s I have will also be reduced from their. The way I look at it if I do not buy another property then I will own my home and 5 IP’s and a Wrap and all will be paid for in 8-10 years. That is $595K worth of property in todays terms that cost me $450 K and returns me $940/week. So in 10 years time I can look forward to a passive income of around 35K (after costs) that I don’t have to leave home for. Of course this is only step one I hope that this will continue to grow and I am finding that the power of compounding works here to in that if you have 5 you may pay them off in 8-10 years but 10 may only take 13-15 years and so on. David Bradley talks about the “no-brainer passive income plan” in steve’s gear.So in closing while I still love positive geared property more than tax reliant property (negative geared) I think you will do well using this method.
Enjoy
ADA great deal of talent is lost to the world for want of a little courage. Every day sends to their graves obscure men whose timidity prevented them from making a first effort.
-Sydney SmithBy the ay Bris22, drop me alie always keen to find out what brisbane people are up to. I am in Brisbane as well.
Enjoy
AD
[email protected]A great deal of talent is lost to the world for want of a little courage. Every day sends to their graves obscure men whose timidity prevented them from making a first effort.
-Sydney SmithHi Bris22
This is certainly a variation of the original approach I used. The one point of directing all funds to paying of the mortgage is that you are then not building up a deposit on the next IP. This is OK if your intention is to redraw the capital to use in the purchase of the next property.
The method I used was to ensure enough equity in the property to be neutral to slightly positively geared at which point any further funds are then earmarked for the next purchase.In this way you should be able to purchase another property every 2 years and avoid cross collaterization.
Over time the increased equity will make the outstanding mortgage seem insignificant as this is a historic amount with inflation eroding the actual amount in relative terms.
Just a word on the income from rental property. Based on my experience the cost are about 30% of the income where no mortgage exists. So for every 2 properties you need one extra to pay the expenses for all 3. This includes land tax as you will find that the land tax net will catch you in about 7 years.
As AD says the other effect will be that the process speeds up in that you can direct the additional income to more IP’s or use the increased equity to buy more of the same.
As an example I recently purchase 3 townhouse with no money in using the value of a fourth townhouse as the LVR. The fourth townhouse still had a mortgage of $40k having originally started at $100k. I am about to release the fourth property from the mortgage as the values have jumped. The net result, I have 3 townhouse now with 100% mortgage and the fourth townhouse debt free.
hth
ziz
Debt reduction is always a good thing, however some people might struggle to pay off your average property in three years, even with rental income.
I find that with a 20% deposit, as per bank requirement, and with principal and int. payment, the loan does gradually reduce.
If the property is reasonably well selected or you add value to it, it will increase in value.you may also be depriving yourself of other investment opportunities.
The topic ‘Does this make financial sense?’ is closed to new replies.
