All Topics / General Property / explaining positive gearing a little simpler?

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  • Profile photo of calderancalderan
    Participant
    @ccalderan
    Join Date: 2015
    Post Count: 4

    Hi guys!

    happy new year to you all and wish you all the best for the future!

    before I ask what might seem like a dumb question please note that I’m pretty young and trying to wrap my head around all of these things here. try not to laugh or give any sighs of disapprovals!

    with the positive gearing method of acquiring properties for cashflow, I was wondering if someone could explain how it is possible to repay the loan for the property, whilst also making a profit? I’ve understood it as splitting the earned money from the rent into thirds (one for the loan repayment, one for future properties & one for savings). Am I anywhere on the right track, far off? the help would be largely appreciated!!

    Profile photo of Kinnon BellKinnon Bell
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    @kinnon
    Join Date: 2014
    Post Count: 151

    how it is possible to repay the loan for the property

    You don’t! :) Keep the loan as interest only so you don’t pay principal down and that in turn helps with cash flow. Capital growth helps take care of the equity.

    I haven’t heard of splitting the rent into thirds before. Unless your LVR is low or you are getting massive rents on the property interest costs would be more than 33% of rental income. Other costs need to be taken into account too such as water and land rates, PM costs, insurances, maintenance etc etc Maybe it’s splitting your wage into thirds?

    Kinnon Bell | Kinetic Funding
    http://www.kineticfunding.com.au
    Email Me | Phone Me

    Mortgage & Personal Loan Broker based in Cairns and Melbourne but servicing clients Australia wide.

    Profile photo of BennyBenny
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    @benny
    Join Date: 2002
    Post Count: 1,416

    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

    Profile photo of Jamie MooreJamie Moore
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    @jamie-m
    Join Date: 2010
    Post Count: 5,069

    Hi Calderan

    Welcome aboard.

    This doesn’t directly address your specific question but I wrote a blog entry explaining the basics of positive/negative gearing a while back. Here’s the link – hope it helps.

    Cheers

    Jamie

    Jamie Moore | Pass Go Home Loans Pty Ltd
    http://www.passgo.com.au
    Email Me | Phone Me

    Mortgage Broker assisting clients Australia wide Email: [email protected]

    Profile photo of calderancalderan
    Participant
    @ccalderan
    Join Date: 2015
    Post Count: 4

    okay I’m gonna have a crack at this! so what you’re saying is that the loan repayments are made by paying the interest only? and the money for rent is split into two, one for future properties or for personal use, and the other half to pay the interest correct? I like to ask as many questions and understand every specific large or small detail so I know exactly what I’m doing so if it seems annoying I am sorry and I thank you for your patience! :)

    Profile photo of calderancalderan
    Participant
    @ccalderan
    Join Date: 2015
    Post Count: 4

    Thank you very much! My main interest was to acquire rental properties, but I guess as the article pointed out, rentals are a good starting point and then every new chapter I suppose of becoming a property investor is something that you’ll gradually learn. An eye opener thank you! :)

    Profile photo of calderancalderan
    Participant
    @ccalderan
    Join Date: 2015
    Post Count: 4

    No thank you this does help because every bit of information does count! My next question would be
    A) how do you identify a possible negative or positively geared property
    B) are you able to choose and property and positively gear it using strategies or not?

    :)

    Profile photo of Kinnon BellKinnon Bell
    Participant
    @kinnon
    Join Date: 2014
    Post Count: 151

    Questions are good!

    okay I’m gonna have a crack at this! so what you’re saying is that the loan repayments are made by paying the interest only? and the money for rent is split into two, one for future properties or for personal use, and the other half to pay the interest correct? I like to ask as many questions and understand every specific large or small detail so I know exactly what I’m doing so if it seems annoying I am sorry and I thank you for your patience! :)

    When you have an investment property, instead of making principal and interest payments where you are not only covering the interests costs but also reducing the principal owed have your loan/s set up as interest only so you are covering the interest costs only and not reducing the principal. This will help with cash flow. Any spare cash you have place in an offset account. Preferably against your PPOR if you have one, if not (assuming you have no other non-deductible debt) then have an offset account attached to your IP.

    Usually there are no easy ratios as to what portion goes to what. You get your rent (and assuming your IP is CF+) you minus expenses such as interest, insurances, land and water rates, PM fees, maintenance etc and what left over is the cream on top to do with as you please. If your rent does not cover these costs then you will have to dip into your own pocket and it turns into a negatively geared property.

    No thank you this does help because every bit of information does count! My next question would be
    A) how do you identify a possible negative or positively geared property
    B) are you able to choose and property and positively gear it using strategies or not?

    A) Do the sums. Excel is good for that. Work out what the loan value will be and the interest charge for that amount (it’s useful to add a 1 or 2% to your sums as interest rates will eventually go up and you want to mitigate for as many things as possible. Then find out what all the associated costs are (some mentioned above). Find out what the property is renting for or could be leased at and minus your expenses from that. Is it in the green or red?

    There are other things to consider too such as tax and depreciation but the above is a guide to help know whether to eliminate a property or investigate further.

    Don’t forgot about capital growth in your chase for positive gearing though!

    B) Yes. If it would typically be negatively geared there are some things you could do to help with the cash flow: renovate, furnish, short term or holiday letting, rent by the room, add a granny flat or rent out the garage or shed separately. I’m sure there’s more but they’re the ones I can think of at the moment and they all have their positives and negatives.

    Hopefully this gives you some food for thought.

    Kinnon Bell | Kinetic Funding
    http://www.kineticfunding.com.au
    Email Me | Phone Me

    Mortgage & Personal Loan Broker based in Cairns and Melbourne but servicing clients Australia wide.

    Profile photo of JZ_33JZ_33
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    @jz_33
    Join Date: 2014
    Post Count: 28

    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.

    Profile photo of Corey BattCorey Batt
    Participant
    @cjaysa
    Join Date: 2012
    Post Count: 1,010

    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.

    Great post JZ.

    Another great thing to remember is that CG and CF properties not mutually exclusive. Some CG properties have strong cash flow, and likewise some negatively geared properties have terrible growth!

    The key in the end is to buy a property with long term desirability. This will drive your growth in both rental and capital gains. Some properties you may purchase with strong cash flow initially as the area is undervalued as it is yet to be ‘discovered’. Once the area becomes chic, capital values improve whilst still retaining that cash flow from your initial purchase – the sweet spot.

    • This reply was modified 6 years ago by Profile photo of Corey Batt Corey Batt.

    Corey Batt | Precision Funding
    http://www.precisionfunding.com.au
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    Investment Focused Finance Strategist - servicing Australia-wide

    Walking to run
    Participant
    @alisdair-horgen
    Join Date: 2014
    Post Count: 68

    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.

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