Here is a simple example of how negative cash flow can be better.
House 1 (positive)
Price $50k
Cash flow +$5k
Capital gain 10% = 5k
Net return = 5k cashflow + 5k CG = $10kHouse 2 (negative)
price $200k
Cash flow -$5k
Capital gain 10% = 20K
Net return = -5K cashflow + 20k CG = $15kThis is a very simple example. Cash flow includes depreciation and tax refunds/payments.
On the other side of things…
If you had a surplus income from your work pay less every day living expenses of $10k per year, then after you had purchased 2 of the House 2’s you would not have any money left to purchase any more and still pay off the mortgages. (Remember each property had a cash flow of -5K). There is no limit to how many House 1’s you could purchase.Andrew
http://www.rentmaster.co.nz
Software for LandlordsJust thought I’d include a couple of other points:
1. Why focus on which is better? -ve gearing is a good investment for certain people, not better or worse than +ve, just different.
2. Most business ventures start off losing money, but with growth turn positive, then very positve. It’s harder to end up a billionaire without putting in any ‘hurt money’.
3. Not everyone wants/ needs extra cash today. For me 75c in the dollar capital gain (post tax) in 12 months is better than 50c in the dollar (post tax) income today.. and always will be unless inflation hits 25% pa.
4. Consider the time frame of the investments. I do my numbers based on 15-20 year holding periods. Nothing I’ve bought will be -ve cash flow after five years, so it generally comes back to capital growth ability as the main deciding factor.
5. “Don’t put all your eggs in one basket”. I’m working on having at least three sources of income, 1. +ve cash property/vendor finance, 2. capital gains, 3. a business totally unrelated to real estate. If one falls over i’ll still have two legs to stand on (see The One Minute Millionaire).
Anyway, that’s my 2c worth.
Brett
For the record I have 4 properties, currently negative, but will go slightly positive when construction on two of them is finished.
Just to repeat this example
because I think we missed that we buying only $50k property in this example for postive and for negative $200k so let make postive also for $200k to make it easy we just buy 4 like that… then see the figure …House 1 (positive)
Price $50k*4 = $200k
Cash flow +$5k*4 = $20k
Capital gain 10% = 5k*4 = $20K
Net return = 20k cashflow + 20k CG = $40kHouse 2 (negative)
price $200k
Cash flow -$5k
Capital gain 10% = 20K
Net return = -5K cashflow + 20k CG = $15kNow you see how +ve cashflow is better than negative cash…..
Cheers
Amit
House 1 (positive)
Price $50k
Cash flow +$5k
Capital gain 10% = 5k
Net return = 5k cashflow + 5k CG = $10kHouse 2 (negative)
price $200k
Cash flow -$5k
Capital gain 10% = 20K
Net return = -5K cashflow + 20k CG = $15k
Here is a simple example of how negative cash flow can be better.This is a very simple example. Cash flow includes depreciation and tax refunds/payments.
On the other side of things…
If you had a surplus income from your work pay less every day living expenses of $10k per year, then after you had purchased 2 of the House 2’s you would not have any money left to purchase any more and still pay off the mortgages. (Remember each property had a cash flow of -5K). There is no limit to how many House 1’s you could purchase.Andrew
http://www.rentmaster.co.nz
Software for LandlordsCrashy,
Simply put, your pessimistic view on negative gearing is wrong. Sure people have been burn’t by it, but that is because they don’t know what there doing. They are not educated, they go out & buy an overpriced $500,000 unit in the city, & lose big time. Or they might buy a 40 year old unit because its cheap, & lose all of the advantages of negative gearing altogether.
Like all investments, there are so many reasons & variables why people fail in ther conquest to make money.
Wealth creation is about making one dollar into 10 dollars by the power of leveraging into appreciating assets like property using other peoples money. Using that capital growth to duplicate into many more properties, without using any of your own money. Negative gearing is a long term stategy, just like wealth building, & you will find that if you buy affordable new quality properties in good locations & hold, than you will do very well.
Chee
I agree with what you are saying but there is only one problem. Because of the property bubble there are no “affordable new quality properties in good locations” left. The trick is not to overpay and at the moment every property on the market will cause the buyer to overpay. Sure some will still grow from this high base, but they are still overpriced now. We will have to wait for the bubble to bust before we can buy without overpaying again!!!
Chee
I agree with what you are saying but there is only one problem. Because of the property bubble there are no “affordable new quality properties in good locations” left. The trick is not to overpay and at the moment every property on the market will cause the buyer to overpay. Sure some will still grow from this high base, but they are still overpriced now. We will have to wait for the bubble to bust before we can buy without overpaying again!!!Totally agree HousesOnly!!!
As some financial sage(whos name escapes me atm) of old said:
Buy in gloom-sell in boom!Well we don’t have so sell if we dont want to, buy the buying in gloom bit sure makes sense.
Cheers
Wayne
House 1 (positive)
Price $50k*4 = $200k
Cash flow +$5k*4 = $20k
Capital gain 10% = 5k*4 = $20K
Net return = 20k cashflow + 20k CG = $40kCheers
Amit
Come on Amit/ Andrew, these figures are sooo out to lunch! You might get 10% gross rental return on a 50k property, ie 5k income, but what about 6.5% loan interest, maintenance, management fees etc. You might end up with $30 per week net, but what about tax? There goes (up to) another $14.55 per week. You said “after tax refunds/payments” Andrew, but you can’t have meant for the CF+ case.
Also the 10% capital gain on a CF+ property is probably on the same lunch break.
JimGuYS,
Things are getting out of control here. We are steering away from what we were all talking about. Its not about which is better, its about if negative gearing works or not.Simply put, if done right, it works.
The facts are both strategies work, but people that have cash flow positive properties have obviously different financial goals to what say I do.
Bottom line here is that I follow & listen only to what the rich do, & that is put my excess cash into property for Compounded Capital growth over the long term. To acquire as much investment debt as I can, while having no personal debt.However I believe if you are going to negative gear, you should buy affordable newer houses, with reasonable land content. Ultimately, its the land that appreciates & buildings depreciate.Why Does the government not allow you to claim depreciation on land? but you can claim it on Buildings, chattels e.t.c. This is why generally speaking, units are not a good investment. They have less than 10& land content, & high percentage of units are bought for investment use only, & not owner occupies like houses are.
Thats enough for me for today
CHEE
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