Even though the entire world seemed to catch an investing cold during the most recent economic recession, the real estate business has bounced back very well and is once again an attractive proposition for those looking to make new investments. If you're getting into the world of property investing for the first time, you will need to learn some of the jargon and the different approaches if you're going to be successful. What are some of the buzzwords and what do they mean?
Positive Cash Flow
Many first timers choose to play it safe and simply want to attain a positive cash flow from their efforts. This means that they will buy a suitable property, make sure that it is ready for the purpose, rent it out and make more for the money coming in than they pay for expenses.
If you're looking at this from a purely layman's position, you might think that that is the only way to go, but there are also advantages in paying out more than you get back in. This approach is known as negative gearing.
Negative Gearing
When you set up a deal so that it is negatively geared, you're going to make a loss on paper. One big advantage is that you can apply this loss to your taxable income, thereby paying less tax. To make this work, of course, you have to be sure that the property is going to increase in capital value. If you can see that this is the case over the long run, then the money that you are losing now will be more than offset by the property's sale price in the future. This can be a risky approach and not for the fainthearted. You also have to bear in mind that you could be liable for capital gains tax on the appreciated value of the property.
Remember also that you're going to have to cover the losses from a cash flow basis throughout the tax year until it is time to apply such losses to your returns. This can make it more difficult to have cash in hand for unexpected expenses, or indeed to invest in developing your portfolio.
Weighing Options
Some people choose to go negative when they look at the value of property prices in Australia. They are at historic highs, while monthly rentals are not. This means that the amount of yield you can get from a purely positive cash flow approach can be lower than it used to be.
As a newcomer, if you're unsure whether to go positive or negative, have a word with real estate experts and accountants who can guide you.
