Forums / Community / Heads Up! / maintaining positve gearing if interest rates rise

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  • Profile photo of barrancebarrance
    Participant
    @barrance
    Join Date: 2003
    Post Count: 1

    I was hoping you could provide some insite on the way in which you prepare you investment portfolio to allow for interest rate rises.

    We have had lowish interest rates for some time now. That is for the entire period which you hae purchased and profited from your possitively geared properties.

    Other than fixing interest rates (which offers only medium term security) do you have any other methods for obtaining properties which would remain as positve cash flow if interest rates were to rise significatly.

    This is the main area which concerned me after reading your book. The potential interest rate future is differetn for someone building an investment portfolio now then it was when you started.

    Profile photo of melbearmelbear
    Member
    @melbear
    Join Date: 2003
    Post Count: 2,429

    Hi barrance

    If you have a look in this forum for the post titled ‘bonus chapter’ Steve talks about interest rates in this. That might help to answer some of your questions.

    Cheers
    Mel

    Profile photo of Steve McKnightSteve McKnight
    Keymaster
    @stevemcknight
    Join Date: 2001
    Post Count: 1,729

    Yep – see:

    http://www.PropertyInvesting.com/bonuschapter

    Bye,

    Steve McKnight

    **********
    Remember that success comes from doing things differently.
    **********

    Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
    https://www.propertyinvesting.com

    Success comes from doing things differently

    Profile photo of OzpatinQ8OzpatinQ8
    Member
    @ozpatinq8
    Join Date: 2003
    Post Count: 40

    Barrance,

    I would like to point out that theres a difference between positive gearing and positive cash flow. +ve Gearing is when raw income exceeds raw expenses, you can be positively geared by not borrowing as much (or paying it back quickly). +ve cash flow involves using on paper tax deductions to optimise your cash flow.

    Hope this helps also

    J

    “Success comes from having the proper aim as well as the right ammunition”

    Profile photo of AdministratorAdministrator
    Keymaster
    @piadmin
    Join Date: 2013
    Post Count: 3,225

    Hi OzpatinQ8,

    You’ve been reading that good looking sheila’s book haven’t you?

    Thanks for the summary though, as I was still trying to wrap my head around the difference. I now understand that the paper (or geared) positive is preferred to the extra injection of cash. Extra cash will reduce the outgoing commitment, but I believe that this must be balanced with the cash-on-cash-return as Steve purports.

    I still feel that Miss Lomas relies heavily on depreciable assets in her approach. Does her approach restrict investment apart from the fact that purchased property need be less than 15 years old?

    Have I finally grasped the concept? I’d be keen to hear your further thoughts.

    Kind regards, Phil

    Profile photo of OzpatinQ8OzpatinQ8
    Member
    @ozpatinq8
    Join Date: 2003
    Post Count: 40

    Yes Phil ya got me ! [:D]

    I havent read Steves book because Im on the other side of the world, but I’ll grab a copy when Im home next. So I cant comment on his cash on cash return.(sounds like ROI ?)

    Ive read quite a few other books on IP’s, and all of them mention how important tax deductions are.

    Ive heard that quite a bit here, that she relies heavily on depreciable assets. I didnt get that from her book at all. What I got was, if something can be depreciated it could turn a -ve Geared property into one with +ve cash flow. Why wouldnt you want to include another Tax deduction like depreciation ? You mentioned extra injection of cash ? Your not putting money in, your claiming it back.

    As for investing retrictions – absolutely ! If Im buying for keeps, 15 years would certainly be my limit. Dont forgot though that you can still claim plant and equipment no matter when it was built.

    Cheers

    J

    Profile photo of AdministratorAdministrator
    Keymaster
    @piadmin
    Join Date: 2013
    Post Count: 3,225

    Thanks J,

    Yep cash-on-cash refers to the return on your cash input, as part of the overall ROI. Compare the opportunity cost of placing your cash part elsewhere to calculate the ratio of borrowings to cash input.

    I see what you mean about younger properties for buy and hold. Depreciable and less presumed maintenance.

    Hope to catch you again on this side of the world soon.

    Kind regards, Phil

    Profile photo of EcclesEccles
    Member
    @eccles
    Join Date: 2003
    Post Count: 69

    I take an increase in interest rates in to my initial calculation.

    For example I use approximately 2 – 2.5% more. Todays interest rates are varying from 5.99% to about 7% depending on where you are going to go for fiance.

    Si I always add 2% onto that so I can see how I would cope if interest rates were to rise.

    Easy and it gives you a buffer

    Bronwen

    If the good die young then I will live forever

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