All Topics / Help Needed! / Postive Gearing vs Positive Cashflow

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  • Profile photo of bwendanbwendan
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    @bwendan
    Join Date: 2004
    Post Count: 30

    Postive Gearing and Positive Cashflow, what’s the difference? Margaret Lomas had a go at explaining the difference in a few of her books, but i still don’t seem to understand the difference, can anyone help?

    Profile photo of debtdoggdebtdogg
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    @debtdogg
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    Post Count: 136

    Hi Bwendan

    To keep it simple-pos cashflow (Steve’s idea) occurs when the income from the property (eg rent) over a period (say 12 months) actually exceeds the outgoings on the property (interest, rates, insurance etc)

    Pos Gearing is usually a “paper” gain. The rental income is actually less than the outgoings but you then take into account depreciation factors (this is where a quantity surveyor can help in valuing the house fixtures and fittings at the time of purchase) and “on paper” with all your deductions taken into account you are actually ahead financially hence positively geared. There are a few issues to consider such as the age of the improvements etc but it can help to reduce income tax.
    Hope that makes it a bit clearer. Margaret Lomass is actually very good to listen to and her concepts seem accurate but she still pushes her businesses as part of the whole concept. Still if you get the opportunity go and listen. There was no hard sell by her just food for thought.

    markk
    Happy Hunting
    http://www.kentscollections.com

    Profile photo of GrantH_1974GrantH_1974
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    Hi bwendan,

    I’ve never heard positive gearing descibed in that way debtdogg described it.

    From my point of view positive gearing and positive cash flow are exactly the same.

    cheers
    Jason.

    Profile photo of williwilli
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    @willi
    Join Date: 2002
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    A lot of ppl confuse the two terms – I know I did for quite some time. But ‘debtdogg’ got it correct.

    Technically Postive Cashflow = cash in your pocket before tax(deductions)

    Where Postive Geared = cash in your pocket after[/] tax(deductions)

    Cheers,

    Pete

    …Beware of the dreamtakers…

    BTW – I was part of the MAP Program and am more than happy to answer and questions/comments you may have – Happy Investing…

    Profile photo of foundationfoundation
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    @foundation
    Join Date: 2005
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    If your definition is correct Willi, why would Steve McKnight promote ‘positive cashflow’ with an end result the same as negative gearing rather than ‘positive gearing’ where the outcome achieves the aim of his methods?
    I agree with JasonB, ‘positive cashflow’ is just a new name for an investment strategy that is very old and commonly known as positive gearing. ‘Positive cashflow’ is actually a poor name for it really, as technically speaking, any rented property has positive cashflow!
    Cheers, F.[cowboy2]

    Profile photo of Lady24Lady24
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    @lady24
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    Hi thought I might put my 2 bobs worth'” in here

    Went to Margaret Lomas seminar the other night and it seems that she and Steve have a diffferent explanation for these 2 terms and this may be why the confusion.

    My understanding is that Steve explains positive cash flow as a basic calculation (before tax bebefits)of the weekly profit of owning the property i.e. rent received – loan repayments = positive result and money in your pocket.
    This is a very basic explanation.

    Whereas Margaret definitely sees this as positive gearing and her explanation of positive cash flow is money in your pocket when you have taken into consideration the tax benfefits of depreciation.
    ie rent received + tax reduction due to depreciation allowances – loan payment – money in your pocket. Hers is based on the help of the tax benefits of depreciation and reducing your personal tax accodingly.

    Hope this helps

    Profile photo of GrantH_1974GrantH_1974
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    @granth_1974
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    My understanding is that Steve explains positive cash flow as a basic calculation (before tax bebefits)of the weekly profit of owning the property i.e. rent received – loan repayments = positive result and money in your pocket.
    This is a very basic explanation.

    I’ve heard this strategy referred to as “how to go broke while making a profit”.

    From my point of view, the overall profit or loss after tax is the only thing that matters.

    cheers
    Jason.

    Profile photo of PurpleKissPurpleKiss
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    I agree with debtdogg’s explanation.

    i would like to know “how you will go broke while making a profit”. True, you will pay tax on your profits but this is rarely more than 100% of your profit. If your tax rate is 42% then that’s what you’ll pay on your profit, so how will you go broke while making a profit when you still ahve 58% of your profits left?

    I look at both aspects when considering a profit. What the cashflow will be like during the year and what effect tax will have on that cashflow.

    I like Steve’s method, becasue if it’s positive cashflow in the first place, you’ve made a profit without needing deductions like depreciation. If you can then also claim paper deductions and therefore pay less tax then that is an added benefit.

    PK

    Profile photo of BennyBenny
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    @benny
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    To me, it doesn’t matter what you call it (but it can lead to confusion, especially in forums) and it seems different people call it different things. The important thing is to understand what your situation means to you, rather than what it’s called.

    FWIW, my take on things is that “negative geared” is when the investment returns a loss BEFORE tax, and “positive geared” returns a profit BEFORE tax.

    Negative gearers can produce a “positive cashflow” from a negative geared property AFTER Tax as long as they have paid tax that they can claim deductions against. If their job disappears, though, there is a non-cash deduction, but no Tax paid which they can claim against, to bring it to “positive cashflow”.

    That’s the way I’ve learned it – so I guess that aligns me more with Margaret Lomas than Steve (now THAT’s a surprise). But then, Steve has a helluva lot more runs on the board than me, so make of it what you will. And he was an Accountant – and I haven’t been one (has Margaret?)

    I should close by stating “Be reasonable – do it my way!!”[biggrin]

    In the end, as long as you undertand where YOU are at, that is probably far more important than “who calls what which”.

    Benny

    Profile photo of debtdoggdebtdogg
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    @debtdogg
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    I thought the whole take on the positive cashflow thing was that it would in time replace your “normal income earning job”. That being said, if you do not have another income against which you can claim deductions then surely if income (rent) less expenses (rates, interest etc) gives you a negative figure you have negative gearing. All that makes it “positive” is the benefit of the deductions you gain from the depreciation, interest etc offset against the income you earn from your “usual job”.

    My understanding of Steves attitude towards neg gearing is that despite how the tax offset effects it, you still have to work harder in your “usual job” to make more money to pay for that negative aspect.

    Thw idea is to have more money coming in than going out AND quit your “normal job”.

    markk
    Happy Hunting
    http://www.kentscollections.com

    Profile photo of BennyBenny
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    @benny
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    As “Debtdogg” said

    That being said, if you do not have another income against which you can claim deductions then surely if income (rent) less expenses (rates, interest etc) gives you a negative figure you have negative gearing.

    Probably the most important thing to understand is this:-

    If you are positive geared, then a positive cashflow is a given – your expenses are all covered, with an amount left over for your pocket. Any Tax deductions will only serve to increase that cashflow.

    If you are negative geared, it’s possible to still have a positive cashflow, BUT ONLY if your deductions give you a Tax refund big enough to offset the losses that you would otherwise have.

    Lose your job, and you will have paid no Tax, thus no refund, resulting in a negative cashflow because of the negative gearing.

    Better?

    Benny

    Profile photo of Don NicolussiDon Nicolussi
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    @don
    Join Date: 2005
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    Hi Guys,

    My 2 cents as well. Have to go with the debt dog on this one.
    .
    Jason:

    I’ve never heard positive gearing descibed in that way debtdogg described it.

    From my point of view positive gearing and positive cash flow are exactly the same.

    .
    When you get over a dozen or so properties the difference b/w gearing and cashflow will be obvious. More money in your bank than out of it each month is what you want to achieve.
    .
    Good Luck.

    Don Nicolussi | Mortgage Broker - Home Loan Warehouse
    http://homeloanwarehouse.com.au
    Email Me | Phone Me

    "I think of finance as a technology, a way of getting things done." Robert Shiller

    Profile photo of MiniMogulMiniMogul
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    @minimogul
    Join Date: 2002
    Post Count: 1,414

    I too think that (surprise, surprise) +ve CF is the only sort of deal to get. Oh, I did by some land once speculatively, but my portfolio is always +ve CF overall – the surplus was paying the rates on the land. Anyway +ve cashflow lets you continue to invest. I heard steve say ‘I have never bought a negatively geared property’. And hey look how well it worked for him. Another fallacy is that the CF+ve don’t go up in value – they do so! They have more capital growth than the negative geared properties, in my experience – though I haven’t yet found out a way to prove this with data – it’s only anecdotally. The other sorts, you can buy one or two or three depending on your income but then you have to stop because you can’t service any more debt. Then you could have loads of equity but still not be able to ‘afford’ to buy any more investment properties.

    However with +ve CF you can keep buying more as each one you purchase gives you a surplus. No matter how small, this adds to your income and serviceability so you can keep going. And of course even with +ve CF properties you can still write off expenses just the same.

    cheers-
    Mini

    Profile photo of eesholeeeshole
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    @eeshole
    Join Date: 2005
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    I’m with Debtdogg on this.

    How about an example:

    Say you buy an IP at $100k, which returns $200 a week, that’s $10,400 a year in rental revenue.

    Say you financed the whole lot with an 80% investment loan, and funded the deposit of 20% and the closing costs of $5k with a redraw from your PPOR line of credit, effectively paying 7% on $105k. That’s $7,350 interest a year.

    Now let’s explore the following 3 scenarios.

    1. Rent $10,400 less interest $7,350 less other costs (mgt fee, rates, insurance, maintenance) $1,500 = $1,550 annual profit. Say there is a $3000 depreciation deduction. Thus, for tax purposes, you have $1450 tax deduction ($1550 – $3000). You are therefore entitled to a tax refund of $703.25 from your property investment activities (assuming tax rate of 48.5%). Cash flow for the year is $1,550 profit + $703.25 tax refund = $2,253.25. You are CASH FLOW POSITIVE

    2. Assume the same rent and interest. This time, your other costs are $5,000. Therefore rent less interest less other costs = -$1950 (a loss). Add your depreciation and your total tax loss is $4,950. From this, your tax refund is $2,400.75. Total cash flow for the year is -1,950 cash loss +
    2,400.75 tax refund = $450.75. You started with a cash flow loss, but your tax refund turned you positive at the end of the day. You are POSITIVELY GEARED.

    3. Same rent and interest again. This time your other costs are $5,000 again, but your depreciation is only say $2,000. Your cash flow is -1,950 again, and your tax loss is 1,950 + 2,000 = 3,950. Therefore your tax refund is $1,915.75. You started with a cash loss of 1,950, you got a refund back of 1,915.75, leaving you with a net loss after tax of $34.25. You are NEGATIVELY GEARED.

    So in summary:

    Positive Cash Flow = Cash profit, you pay some in tax

    Positively Geared = Cash loss, but tax refund more than makes up for it and you are still ahead after tax.

    Negatively Geared = Cash loss, tax refund not as much as the loss. You are still in a loss position after tax.

    How does that sound to everyone?

    Profile photo of MiniMogulMiniMogul
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    @minimogul
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    positive gearing is just negative gearing in denial

    – Minimogul

    Profile photo of bwendanbwendan
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    @bwendan
    Join Date: 2004
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    This is how i understand the difference;
    since the word ‘cashflow’ means ‘The net income from one or more assets for a given period, reckoned after taxes and other disbursements’
    then the word positive cashflow must mean a positive net income after expenses (interest, management fees, etc.) and any taxes or tax benefits.
    So therefore, positive gearing must mean borrowing to invest in an income producing asset and the income from that asset exceed the cost of borrowing and expenses. hows that sound?

    Profile photo of enieuwoudtenieuwoudt
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    @enieuwoudt
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    Bwendan,
    I am happy with that explanation.

    enieuwoudt

    Profile photo of eesholeeeshole
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    @eeshole
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    Post Count: 63

    Actually, sometimes I question whether depreciation should really be taken into account when calculating whether a property is cash flow positive or not.

    That’s because it’s not a permanent gain, it’s only a deferral of tax.

    Example:

    You buy an IP for $100,000. You sell it for $150,000. You pay capital gains tax on the gain of $50,000.

    Say during the time you owned it you had claimed $10,000 of depreciation. Now when you sell it the depreciation claimed will be deducted from the cost base, so your taxable capital gain will be $150,000 – (100,000 – 10,000) = $60,000. Therefore you still end up paying tax on it. You just get to defer it earlier on by claiming depreciation deduction, in return for paying it via CGT when you sell (note, I have ignored the 50% CGT discount for the purposes of simplifying the illustration).

    In a similar way, if you could capitalise the interest on your investment loan, that would make the IP look extremely cash flow positive, but it could well be negative overall.

    Profile photo of kay henrykay henry
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    @kay-henry
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    eeshole- yes, depreciation is an upfront system of deferred tax- get it now, and pay later… UNLESS you don’t sell… or if you DO sell, and you are paying on a profit, well, it’s still a profit, right?

    I think the difference between gearing and CF+… negative gearing was the way to get a tax return- the old “pay $34 a week for this property- ie taxman pays some, tenant pays some, you pay some”). That was the old way of investing- and arrived at the time of OTP’s etc… then people started utilising depreciation schedules, and some accountants worked out that with all the dedeuctions, positive gearing was possible. I think PG and PCF are different in that one is deferred (PG) and one is more upfront (PCF). One is about tax (NG/PG) and one doesn’t rely on the tax system. Hence, I think people on lower incomes were attracted to PCF as it could be returns no matter what income you were on- and when Steve bought his properties, they were cheaper and regionals.

    So one is a tax minimiser/ tax return maximiser, and the other is about income- despite earnings. PCF is probably a more reliable earner- as tax laws can change. Malcolm Turnbull recently made murmurings about generous negative gearing privilege, so we never know what may happen to the tax system in the future.

    Steve bought older properties where there were no depreciation allowances and has spoken of not relying on tax for property… whereas Margaret Lomas has bought newer properties.

    kay henry

    Profile photo of MiniMogulMiniMogul
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    In NZ you can depreciate all properties, no matter how old or new. Another great reason to invest there, apart from no stamp duty, no cap gains tax, CF+ve, low entry, lots of legs in the market, strong economy, low unemployment, growing population, etc etc etc etc etc but I digress…
    where were we…

    bwendan you missed the fact that CF+ve properties also borrow (“gear”) it’s just that they more than break even on all holding costs.

    like I said positively geared properties are just negatively geared ones in denial, i.e. you may get a rax refund down the track, but still, you have to pay into them every week so they are negatively geared properties pretending they are not, basically! and will have (proportionately) exactly the same effect on your wealth as a negatively geared property, i.e. stay in your job, you’re gonna need it. and you better be banking on capital gains, because otherwise you just have a ‘loser’ property. no matter what the tax man tells you.

    hey, if paper losses are all you need to feel rich, why not just give the money to charity, tax deductible, and claim it back as a tax ‘loss’? Then you will ‘get’ the same amount back in tax.

    Now do you see the error of positive gearing in that it is misleading.

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