Does positive cash flow investing work in 2020?

By Sarah Megginson | 30 Sep 2020

An investment property that brings in maximal rental income makes for a good financial playfield during retirement.

It allowisyou to shift the extra cash towards paying down the loans on your other properties, or more ideally, placing a portion of it towards your newly welcomed lifestyle.

However, when your investment property generates a rental income that exceeds the costs to operate it, the property will be termed as being ‘positively geared’, which means that it will be subject to tax.

In saying this, it’s important to meet with a qualified and professional tax adviser to calculate exactly how much of a property’s incoming cash flow you can sweep away for the keeping.

“Income tax is payable on taxable net rent calculated by taking rent income less allowable rent deductions. This is added to the taxpayer's taxable income and income tax is calculated at usual individual rates,” shares Janelle Bartlett, partner at Chan & Naylor.

“The principal component of the loan repayment reduces the net cash flow but does not reduce the taxable net rent,” she adds.

On the other hand, capital works and depreciation deductions often produce negative net rent, which Bartlett says “have no impact on cash flow but can provide significant tax deductions, reducing taxable net rent and tax payable.”

“This negative rent or negative gearing can be used to offset other income and reduce the taxpayer's overall tax bill,” Bartlett explains.

What does retirement age mean?

It’s a momentous milestone that’s worthy of countless champagne showers – and an outlook that will manifest into a lifestyle that varies for each individual.

For founder and managing director at EquiKey, Tom Clark, retirement age means “the age at which you are physically and/or emotionally ready to stop devoting the majority of your time to working a set number of hours in return for set regular payment”.

Rings true to the majority, right?

“This doesn’t necessarily mean you have to stop working or earning money, in fact, quite the opposite,” Clark says. “Ideally, you want to get to a point where minimal input equals maximum output – input being your time and output being money.”

However, to get to that point and attain the financial freedom also, requires a shift in thinking and appropriate planning, the director says.

“The old adage ‘nobody becomes rich working nine to five’, in my experience, always rings true,” Clark says.

“The sooner you start [mentally and financially planning for retirement], the sooner you can reap the benefits associated with retirement, namely, having more time and money to do the things you want to do.”

Clark is at the helm of EquiKey, which is giving homeowners over the age of 55 “a debt-free alternative to a reverse mortgage”.

“By selling a percentage of their home's equity to an EquiKey investor, homeowners can realise the value of this equity now and start putting it to good use, whether that's renovating the home to prepare for later life, paying off debts, or simply having that little bit extra cash on a week-to-week basis that can make a huge difference in terms of quality of life and peace of mind,” Clark shares.

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