How to negatively gear with out negative cashflow
by Greg Carroll at www.attitudefinance.com
As we have discussed in previous articles the way to create wealth through investment assets is by holding them over the long term. If you purchase an investment property and it grew on average by 7% pa, then it would double in value roughly every 10 years.
On that basis you could buy a property today for $250,000 and it would be worth $500,000 in 10 years time. This capital gain provides additional equity for further investment and future wealth. Obviously higher growth property will allow you to build a portfolio more quickly. However this type of property will tend to be cashflow negative in the early stages. Therefore you will need to fund the shortfall until it becomes positive. This early period can place some pressure on cashflow and can often lead to investors selling their investment before any significant gains are fully realised. Which is a shame.
The impact of this negative cashflow can be minimised with the correct loan structure. The following example illustrates.
Phil Smith is planning to buy an investment property for $300,000. His existing home is worth $500,000 with a loan of $200,000. The total costs for the investment purchase are $315,839.
Firstly to avoid cross-securitisation we set up Phil's loan structure as illustrated in table 1.
We also set up an additional $124,000 Line of Credit Limit as illustrated in Table 2.
Let's assume the following:
Table 3 illustrates the results over the next 10 years
There are a couple of things to note from this example.
The above example challenges our generally held belief that more debt is bad and that to get ahead debt should go down. Of course there would be nothing wrong with Phil making additional payments into his home loan as this would reduce his non-deductible debt and increase his net worth.
In the next months issue I will show how you can take this strategy one step further and pay off your home loan in under 10 years.
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