Positive Cash Flow vs Neutral Gearing

Positive Cash Flow vs Neutral Gearing

The basic definition of a positive cash flow property is an investment property where the income (usually derived from payments) is greater than the sum of all of the expenses of the property.

This means that you are bringing in more payments each cycle (week/month/year) than you are paying out in expenses during the same cycle.

So if you have a property that is positive cash flow then the payment is covering ALL your expenses plus giving you some money left over at the end to do with as you would. Learn on the small deals before moving up to the bigger deals. You can find and invest in positive cash flow property and you can achieve financial freedom by doing this. You just have to be willing to put in some work and be willing to learn on the job.

Neutral gearing is off course when expenses and income are equal. If an investment asset is negatively geared an investor can reduce his or her taxable income by the amount of the losses incurred while holding the asset.Feb 1, 2011

Neutral gearing is off course when expenses and income are equal.

1.What is neutral gearing?

Neutral gearing, as you've probably guessed, is when the expenses for and the income from an investment are equal. When this is the case, there’s neither a tax advantage nor a disadvantage.

Neutral cash flow is when you don’t make a profit and you don’t incur a loss. You simply break even.

When most people discuss neutral cash flow they don’t specify whether or not it is calculated before or after tax.

My Knowledge Tips

  1. It is unlikely a property that is exactly neutrally geared exists in Australia.
  2. A property is considered neutrally geared if the holding costs of the property are equal to the income that it earns.
  3. Different types of investors will be attracted to different types of gearing, depending on their income, assets and time of life.
  4. An investor in the beginning or middle of his or her real estate investment cycle will favor the tax deductions associated with a negatively geared property
  5. An investor coming towards the end of their working life or in retirement would favor a positively geared scenario

Neutral gearing means that your investment income covers your investment expenses but no more. You make neither a profit or a loss on your investment. There is no tax paid nor is there a tax benefit. Finding a property with neutral gearing is harder unless you invest more capital upfront (pay a bigger deposit to reduce interest expense). The hope is that either it will become a positive geared investment in the future, or the capital value of the investment will rise and you make a profit on its sale.

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To Your Success
Paul Zalitis
The Aussie Wrapper

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