There have been many debates over the years about whether it’s better to get positive geared properties or capital growth properties.
Without question capital growth properties will make you a lot more money than positive geared properties. The numbers show how far you will be if you chose positive geared properties over capital growth properties.
You cannot get wealthy from positive rental, you end up losing a large portion in tax.
It takes many years to accumulate sufficient number of properties to generate a decent rental income to fund your lifestyle.
However by reducing the principle on your loan, you can have high growth properties with positive cash flow.
Yes ok I hear you say but that means I cannot buy many properties because my Cash flow is “used up” with paying the principle on the loan where I could use the principle payable to fund negative gearing on another property and have two properties rather than one working for you.
That is true in a growth environment, but in a flat property market it’s better to pay off the principle so it’s either neutral or positive geared.
Especially in a low interest environment where you will have more cash available to pay down your principle.
Alternatively it takes around 7 years for the rents to increase sufficiently before the properties become neutrally geared and self-funded.
You can fast track this process by paying down some of the loan to either a 50% to 60% LVR before properties can potentially become neutrally geared.
Hence both positive gearing and capital growth can be found in the same property if you are prepared to either save for a bigger deposit or dedicate some of your money to pay down some of the principle until it becomes neutrally geared.
With the double effect of rental increases and debt reduction it won’t take long before your property growth is neutrally geared and the property funds itself.
At this time you can switch back to an interest only property freeing up Cash flow for the next property and repeat the strategy.
Before you know it you will have several properties all neutrally geared or funding themselves.
This strategy requires you to roll with the ebbs and flows of the market.
When you are too heavily negatively geared you will need to slow down further purchases and pay down some debt to create more equity plus achieve neutral gearing before using the equity generated as security to borrow the deposit for the next property.
This whole wealth strategy can be worked out on a spread sheet and a plan can be developed for a wealthy retirement without compromising your lifestyle too much.
If you would like this done for you please get in touch with your Client Manager from a Chan & Naylor office who can work out your “Wealth 4 Life Plan” for you.
Ed Chan – Non Executive Director Chan & Naylor Accountants
Disclaimer: the above information is for general knowledge purposes only. Please take advice for your specific situation before investing in property. Every person’s personal situation is different and requires a different solution.