explaining positive gearing a little simpler?

Hi Calderan,
Welcome aboard – and please don’t worry about any “dumb questions” – ‘cos the only dumb ones are the ones you DON’T ask (and we never get to know about them…. :p )

I’d like to share a couple of pointers with you – you sound like you are as keen as mustard, so I’d suggest you take some time to read heaps – good books, this forum, some links especially (see below), and really start to get to know HOW it all works before choosing which way that you would make it work. You see, there really are many ways to “make it” with Real Estate.

Currently, Steve has a free book offer (pay P&H only) that is a well-written look at “How he would do it again today, knowing what he knows now, but starting from scratch”. I found it a very worthwhile read.
Go here to get your copy – https://www.propertyinvesting.com/store/0-financial-freedom/

Also, take a look here – it is a thread I am working on that contains several answers to new members’ questions, including a couple of stories of “How people can make it in Real Estate Investing”. https://www.propertyinvesting.com/topic/4410491-the-big-picture-for-new-readers-especially/

Other than that, check out future posts for “meetups” where investors get together all around the country – endeavour to get to one or two of those, just to meet up with like-minded people. There is usually one a month in several of the major centres.

As Kinnon says, we don’t (usually) race to pay off good debt. It is too advantageous to keep it in force. Now bad debt (credit cards, car loans, etc) – that is another story altogether. THAT is the debt to get rid of.

Anyway, grasshopper ;) A lot there is to learn, but learn it you will. The ride you will enjoy !! :p

Benny

My 2 cents worth, though keep in mind I’m relatively new to all this and still yet to pick up my first IP but I have done a fair bit of reading.

To put simply, there are two places where you’ll be making your money, through positive cashflow (if the rent covers loan + other costs) and through capital growth (how much your property is worth in the future).

Positive Cashflow – Nice to have. Allows you to hold a property without forking out each week. Banks love it and will be more inclined to lend you more money for more property purchases provided you have the deposits. However, you won’t be making money from this until you have a good portfolio of these behind you.

Capital Growth – This is where you’ll make real money which will allow you to grow your portfolio. It’s important not to solely focus on positive cashflow, as they might not grow very much. What is important is picking a good property. Also depends on what kind of strategy you have as well, are you investing for the short term or long term?

Identifying whats positive / negative, there are tools out there that can help you do property valuation. What you essentially want to figure out is how much rent you’ll get vs the outgoing costs. You have to factor in costs such Strata, Council rates, Water rates, Insurance, Real estate rental fees and maintenance of the place.

A good way to start might be to just browse a few properties online and see how much they are worth? Figure out how much would it cost you each month? Then see what other similar properties are renting for. You’ll start to get a better idea that way.

Like I said, I’m still learning every day but hope this helps.

Hello Calderan,

Don’t be embarrassed.

To make it really really simple. Imagine you have a business.

Calderan properties. Think of your mortgage interest and other costs like insurance, management fees as your costs. Think of rent as your income. When your business is making money it’s positively geared. If you are not earning as much rent as your costs that’s negatively geared. Thats a simple explanation n

The thing is there is so much everyone now will want to tell you.

I’ll try to be logical. So pos geared wahoo you make money (often as low as $50 a week). Neg geared you don’t even make that $50 income cashflow. So, why would anyone bother saving $50,000 or more for a deposit to make $50 a week or even lose money?

Capital growth. If That $500,000 house goes up by 4% (like in a savings account) that’s $20,000 growth. So, why buy a house instead of just putting it in a savings account? 5% on $50,000 is only $2,000. This is why gearing (borrowing) is so powerful. Even if shares pay higher yields, you can’t borrow 95% of the share price.

So why the fuss on pos geared?

2 reasons, and they’re sort of related.

1. You can afford to pay the interest on your loan. If a property is too negatively geared it can cost you any amount of money to hold on to. Watch country house rescue. Those guys need like £100,000 a year more income to run their mansions, estates etc. That’s why they’re on tv hoping to be saved. If you are positively geared by just $1 a year you are holding on to that house easily.

2. The more pos cash flow you have, the more total income you have. Back to the $50 a week example. If you had just one property earning you that, you’d have $2,6000 more a year. It’s good but it’s nothing to be very excited about. What you can do with that though is interesting. Go and find and online calculator with your income and find out how much you can currently borrow. Now add $2,600 to your income. You’ll be able to borrow a lot more than $2,6000 more. So, ok, now you can get a bigger loan, so what? What if you used each loan to buy 10 more pos cash flow properties. Even a modest $50 each a week.

You can do your own research on pos vs neg, people will jump up and down about it. But, there are some facts.

Negatively geared property is easier to find.
Negatively geared property on new builds offers considerable tax deductions reducing the tax you pay. (My property due to the tax depreciation basically pays for itself. Either the money is depreciated on my house or if I sold it I’d have to pay the same in tax. I’d prefer to have my own house). In this example it’s not unlike health insurance. I earn enough to make it worthwhile having it. At least I can claim medical costs with it. Otherwise I’d pay the same in tax and be less well off.

Positively geared is harder to find.
Positively geared normally involves some kind of work, adding a granny flat, finding a far flung house in a small town. Stuff like that. It takes effort and time to make a house pos geared.

A normal portfolio will often need a balance of pos and meg geared to enable growth. Maybe a house is a great buy but it’s negatively geared. If buying a house will make me money in the first year I’d be happy to pay a bit more to hold it. Maybe a house is pos geared but it’s super risky, a business shop in a town that people have left.

The big picture is important.

read steves books. I just borrowed them at the library.