In particular we focus on getting the loan structure right the first time, choosing which lenders to use in the right order (yes this is important) and finally getting our clients the best deal possible.
Investment Property Cashflow
Positive, neutral and negatively geared are property terms you hear a lot when people talk about investment property. Put simply negative gearing means an investment asset incurs greater expenses than the income it generates, while positive gearing indicates the investment income is greater than its related expenses. Neutral gearing is of course when expenses and income are equal. If an investment asset is held in a personal name and is negatively geared an investor can reduce his or her taxable income from other sources (ie wage income) by the amount of the losses incurred while holding the asset. The other trend often used is “cash flow positive”. A property can be negatively geared but cash flow positive after tax considerations.
Assessing the investment property numbers:
Both positively and negatively geared properties represent different portfolio strategies and are suitable in different circumstances. At the end of the day we would all like an investment that generates positive income from the get go however caution is needed when assessing a new investment property that is positively geared. This usually indicates that it is a high risk in some way. A slightly negatively geared or neutrally geared investment property is usually a safer option and indicates a fair trade-off between (lower) risk and yield.
When looking at whether a property is negatively, positively or neutrally geared we are assuming there is some level of debt involved. However even if there is no debt associated with an asset purchase there is the opportunity cost of using your own funds in place of borrowed money. Interest income from funds sitting in a term deposit for example would be lost if instead were used to buy a property. To compare apples to apples we think it a good idea is to assume 100% gearing when assessing an investment property.
The other point to make is a negatively geared property will over time (if the past is anything to go by) become positively geared / cash flow positive. The power of inflation on rents should ensure this happens in time. Now of course waiting 30 years may not be a good result.
We touched on positive cash-flow property earlier. All positively geared properties are by definition cash flow positive, however neutral and negatively geared property can also be cash flow positive. In brief a positive cash flow property would be one where rental incomes do not cover the full costs of holding the asset, however once the personal tax savings are accounted for the property ends up returning cash flow to the investor.
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