Positive Cash Flow vs Negative Gearing
Positive cash flow occurs when you receive more in payment income from your wrappee than what you pay on the likes of loan repayments, interest, rates etc... A positively geared investment can also be referred to as a 'cash flow property'.
Having a positive cash flow means you’re likely to be making a profit from day one. It'll give you a higher income which you can start putting aside for another deposit—and thus build up your property portfolio. Or you might opt to use the positive cash flow to pay down your principal.
What is negative gearing?
A negatively geared property is one where the cost of owning a property is more than the income it generates. Because this strategy is predicated it on making a loss, it can seem risky. However, you can deduct this loss from your taxable income.
Disadvantages of negative gearing
You have cover the losses yourself before tax time each year, so you’ll need enough cash flow to tide you over. Plus, running properties at a loss can make it harder to build a portfolio.
Lastly, if you’re more highly geared—if you're deeply in debt—you'll be vulnerable to rate rises.
What is negative gearing?
Negative gearing is where you borrow money to invest and the income from the investment is less than the expenses. This is common for property investments, for example, where rental income is less than interest and other expenses. Essentially this means you are making a loss.
You may be prepared to accept a loss if you expect to be able to offset your losses with a capital gain in the future when the value of the investment increases. An investment loss will reduce your taxable income which will reduce the amount of tax you pay.
Keep in mind that if you are making a loss your investment is costing you money. You will need another source of income to fund the extra expenses.
What is positive cash flow?
Positive gearing is where you borrow money to invest and the income from your investment is higher than your interest and other expenses. This means you will have extra money in your budget but you will have to pay tax on the additional net income.
Positively geared investments provide ongoing income and a capital gain if it has increased in value when you sell the investment.
Positive vs negative gearing
Many investors focus on the tax benefits of negative gearing without considering the loss in after tax income.
Positive and negative cash flow
So what investors are really asking is “Can you find me a positive cash flow property?” The bottom line for investors is to estimate the expected “holding costs” or “cash flow”, and not just look for a positively or a negatively geared property.
For me it is all about finding the right property at the right price in areas that do not have to have high capital growth.
If you would like to find out about Making the Positive Cash Flow System Work check out The Aussie Wrapper’s Complete Guide P.13.
To Your Success
The Aussie Wrapper