If you are thinking about investing in real estate, one of the first considerations you will have to make is whether or not to use negative equity. It is wise to do your homework and make sure you will receive the most bangs for your investment.
How Does Positive Cash Flow Work?
This is the typical method of profiting from your investment properties. Simply tally up all of your expenses (such as interest, rates, maintenance, and insurance), and if the rent you receive for the property exceeds your expenses, you are creating positive cash flow.
Advantages of Positive Cash Flow
- If you have a positive cash flow, you are more likely to make a profit right away. With a bigger income, you can begin putting money down for another deposit and develop your portfolio in this manner.
- You might also use the extra cash to pay down your home debt. In either case, you will be better off financially in the future.
Disadvantages of Positive Cash Flow
- The major downside of having a positive cash flow is that you will have to pay more tax because you will have greater revenue.
- Due to socio-economic conditions, there is also the possibility of increased maintenance costs and more tenancy issues.
How Does Yield Affects Cash Flow?
You can calculate your yield by dividing your gross annual rent by the purchase price of your investment property (it is expressed as a percentage).
Property prices in Australia are at an all-time high (compared to rentals), resulting in low yields for many investors.
As a common rule, the higher your yield, the more likely you are to have a profitable property. But do not take chances – as an investor, it is important to conduct your research before making a purchase.
What is Negative Gearing?
When a property is negatively geared, the expense of ownership exceeds the income it produces. Because this method yields a loss, it may appear hazardous at first, but there are other advantages that can work in your favour in the long run. As an instance, you can deduct the loss from your taxable income.
Advantages of Negative Gearing
While you are losing money, the value of your property is (ideally) increasing. Negatively geared investors hope that their overall loss will be mitigated by the prospective capital appreciation of their property. Keep in mind that there may be tax ramifications (such as capital gains tax) to consider if and when you sell.
Saving tax is not the sole reason to choose an investment strategy, but it is something to consider when you analyse your options.
Choosing to Negatively Gear
You will need enough cash flow to cover your losses until the end of the year when taxes are due. Negatively geared investment properties might make it more difficult to create a portfolio because your spare cash is tied up. You will be more exposed to rate hikes if you are more heavily geared (in debt).