All Topics / Help Needed! / slightly confused – negative gear or cashflow positive ?

Viewing 13 posts - 1 through 13 (of 13 total)
  • Profile photo of yaldwynyaldwyn
    Member
    @yaldwyn
    Join Date: 2010
    Post Count: 5

    Hi all
    althoigh i have built and owned a few properties over the years i am looking at my first investment property.
    I currently pay about $25000 pa in income tax from my job with no real deductions so getting any sort of return takes some creative bookwork.
    i am looking at two properties,both units. Property one is priced at $230000 and returns $330 p/w rent the other is $249000 and returns $380 p/w.
    My question is basically this – Should i buy No.1 and as it would be slightly negative geared and take advantage of the tax breaks associated with that deal or buy No.2 as a cash flow positive investment. For either propertyI will need to borrow 95% and plan to capitalise the LMI. I am able to contribute about $2000 per month extra into an offset ac on top of any other outgoings. It seems that either deal would be a good start but I just thought I would put it out there to people who have done it before and get some real answers and not some BS from someone trying to put me on a path for their own gain.

    Ragards to all
    Nick

    Profile photo of dtrumpdtrump
    Participant
    @dtrump
    Join Date: 2010
    Post Count: 50

    I would treat each property on there own merits, are both properties similar in terms of the future capital growth potential? Does one have even further rent potential with a few developments and/or does one need more spent on it in terms of up-keep?

    Also, for property #2 is that projected rent return based on a renal appraisel and taking into account all months of the year (i.e. is it student accomodation)?

    Also, looking towards the future, what do you forsee will be your barrier getting into investment property #2. Will it be cashflow/serviceability or will it be pulling together the next deposit. All other things remaining the same;
    – starting with a positive cashflow property will position you well to move onto investment property #2 (in terms of loan servicability),
    – wherease starting with a high growth potential property will provide you with some equity to leverage for IP#2 deposit.

    Profile photo of Jacqui MiddletonJacqui Middleton
    Participant
    @jacm
    Join Date: 2009
    Post Count: 2,539

    Hiya –

    The thing that you must remember about negative gearing is that involves a loss.  You get a bit of a rebate back on your tax return for the loss, but not all of it.

    Your cash flow is good.

    If you were lookig only at numbers, the property at $249k has a better return, and for not much more input from yourself in terms of deposit.  It'll always provide you more rent than the other, which is nice when you reach retirement :-) However no point having an empty property.  You'd need to look at the demographic of the area (eg % of students vs old people etc living there) and who the target market is likey to be for these properties.  Is there a big demand?  How long do such properties take to rent out?  Real estate agents can give you an idea, but not the selling agent ;-) Be wary about telling a real estate agent the exact property you intend to buy in case they notice it is a good deal and tell their mates to buy it.  Just ask for eg "so a 2 bed unit with a newish kitchen within 500m of the train station, what is the rental range for that sort of thing? and how long would such a thing remain vacant on the market?"

    Jacqui Middleton | Middleton Buyers Advocates
    http://www.middletonbuyersadvocates.com.au
    Email Me | Phone Me

    VIC Buyers' Agents for investors, home buyers & SMSFs.

    Profile photo of Jacqui MiddletonJacqui Middleton
    Participant
    @jacm
    Join Date: 2009
    Post Count: 2,539

    ps they are great returns!  i'd love to know what town this is in!

    Jacqui Middleton | Middleton Buyers Advocates
    http://www.middletonbuyersadvocates.com.au
    Email Me | Phone Me

    VIC Buyers' Agents for investors, home buyers & SMSFs.

    Profile photo of yaldwynyaldwyn
    Member
    @yaldwyn
    Join Date: 2010
    Post Count: 5

    Hi there
    Thanks for all comments
    To JacM I can tell you that I live in a mining town where rents are always strong and with good occupancy rates.
    The two units I mentioned in my earlier comment have both been recently renovated and need no work or upkeep for some time they are both currently rented out with new leases within the last month so either purchase would be a good start for me (both would be better) which I am looking at. Meanwhile heres a tip for anybody looking at a good capital growth town over the next few years
    Charters Towers in Qld is very good buying at the moment with its close proximity to Townsville and the mining area of the Bowen Basin good returns should be expected

    Profile photo of Jacqui MiddletonJacqui Middleton
    Participant
    @jacm
    Join Date: 2009
    Post Count: 2,539

    Thankyou heaps for your reply!

    Something you might want to consider is not putting all your eggs in one basket.  In other words you wouldn't want all your property in one town or reliant upon one industry.  If something happens, your entire portfolio is exposed.

    Jacqui Middleton | Middleton Buyers Advocates
    http://www.middletonbuyersadvocates.com.au
    Email Me | Phone Me

    VIC Buyers' Agents for investors, home buyers & SMSFs.

    Profile photo of yaldwynyaldwyn
    Member
    @yaldwyn
    Join Date: 2010
    Post Count: 5

    Thanks JacM

    This is what I needed someone who can throw things at me to make me think !!
    I have been in this town for 4 years and have found it to be a transient town with plenty of people coming and going so I am not worried about having two rentals here. Believe it or not the rental returns I mentioned earlier are quite low for this area so I will have plenty of room to move in that area with no outlay from me. What do you think really about those properties – one slightly negative geared the other a small cash flow positive investment is this a good idea to mix them up or not ? I obviously have'nt but definately need to talk to my accountant as I am unsure how the whole gearing set up works.

    Profile photo of JT7JT7
    Member
    @jt7
    Join Date: 2010
    Post Count: 286
    yaldwyn wrote:
    I can tell you that I live in a mining town where rents are always strong and with good occupancy rates

    Hi Yaldwyn…

    wouldn’t happen to be Emerald? Only asking because I have property up in Emerald.

    JT

    Profile photo of yaldwynyaldwyn
    Member
    @yaldwyn
    Join Date: 2010
    Post Count: 5

    Hi JT

    No not Emerald
    Although with the infrastructure already in that large town another good qld investment area

    Profile photo of Richard TaylorRichard Taylor
    Participant
    @qlds007
    Join Date: 2003
    Post Count: 12,024

    Hi Nick

    Coming in a bit late in the peace but heh here goes.

    Firstly i will assume that you have already got pre-approval for a 95% lvr as that sort of lvr in a regional town might prove harder than you think. I can think of a couple of lenders but thats about it unless your existing customers.

    Over and above this if the properties have been renovated then you would expect to be able to claim on both the Capital Allowance / Depreciation which being a non cash deduction will help defray some of the monthly shortfall.

    Richard Taylor | Mortgage Broker helping investors build their wealth thru property
    http://www.mortgagecapitalaustralia.com.au
    Email Me

    100% Investment Finance now available on selected properties. Email us for further information.

    Profile photo of Daniel CameronDaniel Cameron
    Participant
    @daniel-cameron
    Join Date: 2010
    Post Count: 46

    End confusion go for positive cash flow. I think 20% deposit is better though.

    Profile photo of Jacqui MiddletonJacqui Middleton
    Participant
    @jacm
    Join Date: 2009
    Post Count: 2,539

    Hi again

    I have not researched your area at all, nor areas near mining.  So I couldn't comment on whether either of these buys are a good idea.  You'd be far more qualified to comment than I would.  If you have done your research, then you will already know the answer.  I recently bought into an area which I had tracked for about a year by means of watching the stats in the rear pages of API magazine to watch capital growth, rental yield, and vacancy.  I spoke to council a lot about what was happening in the area, and what was allowed in general in terms of minimum block sizes, development etc etc.  I also watched http://www.realestate.com.au very closely – the for sale and rent sections, to understand prices, and how quickly stock moved.  I also spoke to many local estate agents about demand.  I went to heaps of open for inspections.  Eventually I found I knew how long it would take for a property to rent, and what it would rent for.  I'd paid enough attention to be rock solid in my understanding of the area.  The point of the story is, do your monitoring until you are sufficiently confident in what you are doing.

    I myself have a number of "thoughts" that I have about investing.  And one of them is the concern about putting all my eggs in one basket.  Let's say I sunk all my cash into a mining town, and then that business closed.  All of a sudden my entire portfolio would be a little value.  Or something else like let's say a storm rips through town and damages the rooves of all your properties, and insurance either won't pay out, or takes too long to do so and you are forced to find the money to fix them yourself.  Flood.  etc etc.  The point is that if all your stuff is in one area, you are VERY exposed if something unfortunate occurs.  You don't have properties in other towns to pick up the slack when one stumbles.

    I really couldn't say whether you should go 100% cash flow positive, or all negative geared.  Some people are in the positive cash flow camp.  Others are in the negative gearing camp.  Others do a mix.  First and foremost though, you need to do SOMETHING.  You can't have a property that grows in value if you don't have a property.  And also you should purchase in a manner that you can afford. No point buying property that doesn't give you room for coping with a quarter of a percent rise in interest rates.  Or an unforseen dental bill.  Or any number of other things.  A mortgage tends to last for about 25 years.  Sure you can tighten your belt for a couple of years.  Be stingy with where you'll go out due to cost etc etc.  But can you live your life this way for 25 years?  Probably not!  Purchase in a manner that you can afford, and that allows you to have a bit of a life at the same time.

    Jacqui Middleton | Middleton Buyers Advocates
    http://www.middletonbuyersadvocates.com.au
    Email Me | Phone Me

    VIC Buyers' Agents for investors, home buyers & SMSFs.

    Profile photo of Jacqui MiddletonJacqui Middleton
    Participant
    @jacm
    Join Date: 2009
    Post Count: 2,539

    Richard Taylor made a great point above.  Many people don't know about depreciation schedules and being able to claw tax back because of them.  If you are unfamiliar with it, do a bit of googling on the topic, or ask us to explain further on here.  Quantity Surveyors produce depreciation schedules… they cost around $500 apparently.

    Jacqui Middleton | Middleton Buyers Advocates
    http://www.middletonbuyersadvocates.com.au
    Email Me | Phone Me

    VIC Buyers' Agents for investors, home buyers & SMSFs.

Viewing 13 posts - 1 through 13 (of 13 total)

You must be logged in to reply to this topic. If you don't have an account, you can register here.