Cash Flow Versus Capital Growth
The reason why the negative gearing debate remains unsolved is because “capital growth or cash flow?” is a crux question which is actually very difficult to solve. In an article for the website Property Update, Michael Yardney adds further value to the subject.
Cash flow or capital growth
Cash flow is all good but even the best investment properties do not generate it in the first few years. Put another way, for such properties, the rental returns are less than the mortgage payments thus forcing investors to pay out of their pockets. These negatively geared properties are however goldmines for capital growth. It is not hard to decipher that it is this capital growth which gives us the equity to buy the next property.
Why some investors are against capital growth
Many investors are not willing to use negative gearing and claim tax deductions because it means creating a negative cash flow and paying out of one’s own pocket. This tendency can be put down to many things. As a first, some investors have just too many expenses to take care of or are living on single income.
There is also the herd mentality or what we refer to as “safety in numbers”. We tend to give more weight to positive cash flow because it is what the world does.
Negative gearing is not a strategy
If you think negative gearing is an investment strategy, Yardney asks you to think again. It is just how you have financed your loan. If your Loan to Value Ratio (LVR) is low you will have a brilliant chance of positively gearing your property because your mortgage outgoings will likely be lesser than the rent you fetch.
You can read the original article here.
Large portfolio have a considerable advantage
Capital growth has no substitute when it comes to building a profitable property portfolio. Moreover, it is common knowledge that negatively geared properties do not remain so for long. With large portfolio, the story is markedly different because then you have a choice of using capital gains for some properties and offsetting them with positive cash flow of others.