Negative gearing is not the way forward: Kevin Lee

Negative gearing is not the way forward: Kevin Lee
Negative gearing is not the way forward: Kevin Lee

Most people confuse cash-flow and gearing believing they're the same thing; they're not.

Cash-flow is the pre-tax income your investment property generates week after week, whilst gearing relates to how your investment property is financially structured after tax.

Few investors are aware that negative gearing is a financial trap. In a nutshell, negative gearing is where you lose money month in month out - because you believe the value of the property will increase sufficiently over the short term, to offset those monthly losses. Some people mistakenly believe that it's smart to invest purely for the tax benefit.

Smart investors however, know that negative cash-flow on a weekly to monthly basis does not facilitate a multi property portfolio.

Negative cash flow is when the expenses for a property exceed the income the property generates.

Some investors don't realise that negative cash-flow can also occur in positively geared properties as well. Longer-than-expected vacancy periods, major repairs, maintenance and other ongoing expenses can sometimes result in negative cash-flow, for a short period of time.

If you're property is positively geared and generating negative cash flow then you've probably run into some larger than normal expenses.

Tip - it's a good idea to keep a cash buffer of three months loan repayments in an offset account - it becomes useful when you have repairs or go through short term financial hardship.

Also don't ignore the fact that your property could be producing a negative cash flow because the market in which your property lives may be experiencing low rental demand. This could signal that it's time to renovate.

Nonetheless, in its purest sense negative cash-flow is highly disabling and will prevent you from going forward and growing your portfolio. A smart property adviser can help you reverse your negative cash-flow situation; often it's simply a case of restructuring your incorrect or impractical finance structure.

However - as is the case with negatively geared property - your income can only service a limited number of negative cash-flow properties .... before you start to feel financial strain.


Kevin Lee is the property investment expert and buyer's agent at Smart Property Adviser.

Kevin specialises in helping investors identify and acquire positive cashflow properties that generate high rental returns, enabling his clients to grow their portfolios.

Kevin's free report "How To Turn Your Negatively Geared Property Into A Positive One In 3 Steps - Without Selling" is available at www.smartpropertyadviser.com.au.

 


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