Advantages

  • Returns money into your pocket from day one as the tenant is paying more than your expenses to hold the property.
  • Under valued properties with renovation potential and subsequent depreciation benefits from the capital improvements, can bring a property from a net loss to a net gain.
  • New properties with high tax benefits can achieve positive gearing.
  • Increased borrowing capacity due to higher income.

Disadvantages

  • Increased income which means you move into a higher tax bracket and pay more tax.
  • Typically positive geared properties are “positive” because of depreciation benefits (after various tax advantages they become positive).
  • These properties can be sourced near the city, however are typically referred to as being in regional areas. These regional properties may be largely dependent on one particular employment industry, making investments subject to greater volatility and therefore produce lower levels of capital growth over the long term.
  • It can be harder to finance properties in regional areas as lenders have suburb restrictions due to higher perceived risk, resulting in a larger deposit required to fund the investment.
  • It may be harder to lock in a long-term tenant due to lower population and employment demand.
  • Tenants may be more problematic due to socio-economic factors such as crime or unemployment.

With negative gearing, you can claim a tax deduction for the losses, but it still costs you real money, typically thousands of dollars a year. The strategy works if property prices go up enough to compensate for the losses.

"We did have negatively geared property years ago and it impacted on our personal finances and we decided not to go down that path again,"

Many property investors are relying on big capital gains when the property is sold to more than make up for the losses along the way. In the current climate, investors need to rethink how they are going to make it pay.

Some experts suggesting positive gearing is the way to go, regardless of what the government of the day decides to do with negative gearing tax breaks.

An investor may start off "neutrally geared", where the costs equal the rent, or even negatively geared with the investment eventually becoming cash-flow positive as the mortgage is paid down and rents rise.

Positive gearing also mitigates the risk that the generosity of the tax breaks, when negative gearing, could be curbed or limited.

Pressure is building to curb the tax effectiveness of negative gearing as it costs the federal budget about $4 billion in forgone tax revenue each year.

Calculations for Negative Gearing Property:

Purchase for $300, 000.00
Rent: $200 per week
Interest Rate: 5%
Mortgage cost over 30Years
Deposit $30,000= 10%
Payments: $270,000=  $335.00per week
Rent Income over 1 Year= $10,400.00
Cost to you is: $17,420.00 per year.

You must find at least per year: $7020.00 + Rates + Water +Insurance and all other repairs needed for the property. (Yes you may be able to claim some of these things on your tax but for how long if the governments changes legislation on Negative Gearing)

Positive Cash Flow ( Vendor Finance)

Calculations for Positive Cash Flow ( Vendor Finance)

Purchase for $300, 000.00
House Payments: $200 per week
Interest Rate: 5%
Mortgage cost over 30Years
Deposit $20,000= 10%
Your Payments: $280,000= $348 per week
Payments over the year: $18,096.00

New Owner (Wrappee)

Purchase price= $300,000
Deposit = $20,000
Interest Rate: 7%
Payments: $280,000=  $ 430.00per week
House payments over 1 Year= $22,360.00
Positive Cash Flow per year is: $4,264.00

(New purchaser the Wrappee ) pays for the Water, Insurance and Rates each year you do not.

Get your Free report on Positive Cash Flow Property Investing Secrets: Click here »

To Your Success
Paul Zalitis
The Aussie Wrapper

 

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