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  1. #1

    Default Low Yield Property + Capitial Gain + Negative Gearing Questions

    Hi

    I am new to PI. I understand the importance of getting properties with a reasonable yield. However, what about the following scenario;

    • Buy a property with a yield at 6.5 - 7%, but in an area that I anticipate to experience capital gain.
    • The loan size is small enough to be managed by my income, even if interest rates rise to 8 - 9%.
    • The property will either provide very low profits or potentially become negatively geared for the first year.
    • After the first year, can you recalculate the yield as your loan has reduced?
    • Can you use the negatively geared property for tax deductions?


    Cheers

  2. #2
    Join Date
    Sep 2013
    Location
    Auckland
    Posts
    3,885

    Default

    Quote Originally Posted by rawrree View Post
    Hi

    I am new to PI. I understand the importance of getting properties with a reasonable yield. However, what about the following scenario;

    • Buy a property with a yield at 6.5 - 7%, but in an area that I anticipate to experience capital gain.
    • The loan size is small enough to be managed by my income, even if interest rates rise to 8 - 9%.
    • The property will either provide very low profits or potentially become negatively geared for the first year.
    • After the first year, can you recalculate the yield as your loan has reduced?
    • Can you use the negatively geared property for tax deductions?


    Cheers
    Hi Rawrree

    Your strategy is probably used by 90% of investors out there, and it has been done in the past few decades if not longer! So there's no problem in that.

    Negative gearing is why LAQC and LTC exist, so there are plenty of investors doing it!

    If you can buy 1 property per year, then that's really good!

    The things you need to watch out for are:
    1) make sure you are buying in a caital gain area, ie main centres
    2) make sure you can support yourself and your portfolio in bad times, ie how safe is your job/personal income? (The main reason why I work for council, job stability)
    3) make sure you can survive financially even if interest rates go to 8-9%
    4) rent review + rent review + rent review. As time goes by, your cashflow situation will improve as rents rise with time

    When you have a couple properties (by then you would probably hit rent reliant), then perhaps you need to look more into cashflow properties later to grow more.

  3. #3

    Default

    Thanks for your response.

    All these posts about "you must have 10% yield" etc had me running scared. Thanks for the clarification.

  4. #4

    Default

    Is it simple enough to work through LAQC and/or LTC? Is it generally best to see someone about this?

    Any resources on the matter would be appreciated,

    EDIT

    I found a useful guide on IRD website
    ird.govt.nz/forms-guides/title/forms-l/ir879-look-thru-companies.html?id=righttabs

    From what I've read LAQC is no longer and option due to legislative changes in 2010/2011.
    Last edited by rawrree; 10-02-2014 at 12:06 PM.

  5. #5
    Join Date
    Sep 2003
    Location
    High up above and deep down under
    Posts
    10,915

    Default

    Negative gearing is why LAQC and LTC exist, so there are plenty of investors doing it!
    I thought LAQCs were made extinct.
    "There's one way to find out if a man is honest-ask him. If he says 'yes,' you know he is a crook." Groucho Marx

  6. #6
    Join Date
    Sep 2013
    Location
    Auckland
    Posts
    3,885

    Default

    Quote Originally Posted by rawrree View Post
    Is it simple enough to work through LAQC and/or LTC? Is it generally best to see someone about this?

    Any resources on the matter would be appreciated,

    EDIT

    I found a useful guide on IRD website
    ird.govt.nz/forms-guides/title/forms-l/ir879-look-thru-companies.html?id=righttabs

    From what I've read LAQC is no longer and option due to legislative changes in 2010/2011.
    It's Look Through Company LTC now, you should see an accountant about that.

    Basically for a rental, if it's negative cashflow or loss making, you go with LTC or Sole Trader.

  7. #7
    Join Date
    Jun 2013
    Posts
    2,091

    Default

    Quote Originally Posted by rawrree View Post

    • Buy a property with a yield at 6.5 - 7%, but in an area that I anticipate to experience capital gain.
    • The loan size is small enough to be managed by my income, even if interest rates rise to 8 - 9%.


    If your buying with a yield that is lower than the cost of finance, where is the capital gain going to come from?

  8. #8

    Default

    Quote Originally Posted by elguapo View Post
    [/LIST]

    If your buying with a yield that is lower than the cost of finance, where is the capital gain going to come from?
    I don't think I understand your question sorry. Could you please explain further.

    Cheers

  9. #9
    Join Date
    Jun 2013
    Posts
    2,091

    Default

    Your buying a property that you will rent out at a loss. You expect that this loss will increase as interest rates rise. You are doing this in the belief that someone else will pay more for the property and, hence, make an even bigger loss.

    Why do you believe someone will pay more for a property when it will be losing more money as an investment?

  10. #10

    Default

    Quote Originally Posted by elguapo View Post
    Your buying a property that you will rent out at a loss. You expect that this loss will increase as interest rates rise. You are doing this in the belief that someone else will pay more for the property and, hence, make an even bigger loss.

    Why do you believe someone will pay more for a property when it will be losing more money as an investment?
    Ahh good point elguapo! Thanks for elaborating.

    Is it typical for rents to rise in areas that have experienced capital gain? Therefore your yield increases with capital gain?

    Can you recalculate the yield each year as your loan reduces? Or are you just ignoring the money lost on the property previously?


 

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