Positive and negative gearing

One of the most frequently asked questions I get as a property advisor is, “Can you find me a positively geared property?” Investors seem to want a property that pays for itself. Most investors believe that you need a high rental yield of 8%-plus on the property. That is what positively geared property is all about – having the income cover all the expenses. Right?

Finding positively geared property is not so easily achieved in many markets around the country. A lot of investors are wary of high risk, high return areas (eg mining towns) where high rental yields can be achieved. These high returns from the rent can also be eroded by unexpected expenses. Ask any investor who has received an unexpectedly large bill for maintenance or breakdown of a hot water system that has turned it into a negative cash flow property.

So what about a negatively geared property, where the expense of holding the property is more than the income from the property? Many investors avoid this strategy as they see money coming out of their pocket, even though these expenses can be tax deductible. It may surprise investors to know that a negatively geared property can have a positive cash flow outcome. It can put money into your pocket or bank account as well.

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 with strong drivers for capital growth. My criteria is to have the property cash flow or pay for itself, not just from the income (rent) but from the taxman as well. I do not focus just on positively geared property to put money in my pocket. I want capital growth, so I crunch the numbers to find the right positive cash flow property.

Crunching the numbers

I use an easy cash flow estimator to do all the number crunching. In working out your expenses you need to include the total interest paid on the mortgage, rates, body corporate or strata fees if applicable, insurances (landlords, building), property management fees and depreciation claims. Estimating a maintenance budget is critical for most properties, unless they are brand new.

Depreciation expenses can be the key to a positive cash flow

When I finally understood the effect that depreciation claims could have on the holding costs of a property it was a light bulb moment. Depreciation is a paper expense that can be added to the actual expenses of my property, increasing my total expenses, hence increasing my total tax deduction, and hence increasing my tax refund.

For example: A new property purchased for $370,000, on 90% borrowings with $420 per week rent has an estimated loss of $4,000, so the property is negatively geared. However, the depreciation claim is added to the expenses, so a higher claim of -$16,000 off taxable income is made. The property is estimated to be $600 per annum cash flow positive at 30% tax rate, and an estimated $2,000 per annum cash flow positive at 40% tax rate after a tax refund.

Weekly holdings estimator for crunching the numbers

So it is possible to have cash flow positive property that pays for itself from the tenant (rent) and taxman (tax refund). With this formula investors can build a portfolio faster with low or no holding costs and have far more properties to choose from. It is all about crunching the numbers first.

If you would like to have my easy cash flow estimator to crunch the numbers or the story on my property above please email lindy@rocketpropertygroup.com.au  Next month I will write about the popular saying “Land appreciates, buildings depreciate” and what it really means for investors.

Lindy Lear

Lindy Lear is a successful property investor who had a late start into investing, yet has grown her portfolio to eight properties in three years. She is a qualified property advisor and general manager of Rocket Property Group, and she won the Reader’s Choice Award in 2009 and 2012 for Property Investment Advisor of the Year. Lindy is passionate about helping others realise their goals through investing in property, and can be contacted at 02 8012 9669 or visit www.rocketpropertygroup.com.au