Cash Flow Real Estate
The ownership of property for investing means that the investor must be aware of the cash flow that the property produces. There are two types of cash flow properties.
Negative Cash Flow
This type of property has income from rent which is less than the repayments on the loan. That is, the property cost more per month in repayments to the banks that the owner receives from rental returns. The loss incurred becomes a tax deduction for which the owner claims back. The overall effect is to get taxation gains or savings whilst still relying on capitol appreciation of the property.
Positive Cash Flow
When the income from rent exceeds the repayment amount to the bank, the property is said to be cash flow positive. The owner will pay a taxable amount on the end result of the rental return but this can be minimised by the tax benefits of depreciation and repairs on the property.
The difference between the two types can be minimal and proper research should be done so that the financial structure of each is in place at the time of purchase.
Points To Consider
Your tax bracket in the years of ownership will determine your strategy for positive or negative gearing. If you plan to go positive gearing, then you will not want to get a wage increase or a sudden decrease in your income. Allowances should be made for changing fortunes, over the lifetime of the investment.
The type of loan you get for your investment can dramatically influence your results. A rise in interest rates or a fall in interest rates will influence your outcomes. In some cases an interest only loan should be considered, and then the possibility of fixing your interest rate. With a fixed interest rate it is much easier to calculate the ongoing financial position of your investment.
Depreciation allowances should be factored into your purchase. Most dwellings have a 40 year depreciation life and your purchase should allow for the life left in depreciation. The amount of depreciation you claim each year will have a bearing on the final sale outcome of the property. If any depreciation has been over allowed for, then payments in tax may have to be returned.
Sometimes the difference between a positive cash flow property and a negative cash flow property is only as much as $10.00. Rental returns should be flexible and the rental agreement should allow for rising costs and unforseen events such local rate rises and increases in insurance premiums.
Talk to your accountant to establish the relevant tax benefits of each type of property investment. Establish if positive cash flow property is better for your situation. For more information on investing in real estate , visit http://www.learnhowtoinvestinrealestate.freedvd.com.au
James McInnes is a professional share market trader and investment entrepreneur, with many years experience trading the Australian Share market. You can visit his site at http://www.learnhowtoinvestinrealestate.freedvd.com.au for further information on trading the Australian Share Market