How to make more money by Investing in Positive Cash Flow Property

Gearing is a technique commonly used to finance the purchase of property. Negative gearing is most commonly used to promote ‘tax-schemes’ and is sold to investors based on emotional promises rather than on sound logical analysis.

The following example should illustrate how it works. Assume, you have R20.000 to use as a deposit, and you ‘gear-up’ to purchase a property valued at R100.000, by borrowing R80 000 from a bank.

Your net annual loss position is R1 800. Unless your property has appreciated by at least this amount, you have a real loss. It thus becomes vitally important that your investment increases by at least R1 800 per annum, with great certainty.

Positive gearing is when the income you make on your property is more than you need to pay in expenses (levy, rates, maintenance and any other costs) and, as a result, you profit in the process. This profit may be taxed, but you end up with surplus cash to put in your pocket. With positive gearing, the need for the property to increase in value is not so important.

Before investing in a rental property it is extremely important that you assess:

·        the potential for the property to be fully tenanted;

·        your ability to fund the annual loss;

·        the potential of the property to become positively geared;

·        the potential of the property to continually increase in value.

 If there is no great certainty of meeting these criteria, your R20 000 deposit could be put to better use.

 Next time someone tells you that a tax deduction from subsidizing someone to live in your property is a good thing; remember that in order to get a tax deduction you first have to lose money, which was part of your cash flow. Proper financial planning suggests that that lost cash flow could rather have been used to produce additional income than to create additional expenses.