Comments on: Which side of zero to gear?

By: AJC

AJC — Thu, 17 Jul 2008 21:33:34 +0000

@ Luis – In the current market it is hard to expect/anticipate capital growth (a.k.a. appreciation) so positive gearing/cashflow is something to look for. Of course, if both cashflow AND appreciation look weak, you need to question if the investment ‘stacks up’ and perhaps, as you suggest, reserve your capital (‘deposit’) for something else.

By: Luis

Luis — Thu, 17 Jul 2008 21:00:26 +0000

AJC,
Has it been 45 days? How time flies…I guess I’m hovering right around both IF the negative amount is small and I can rent/lease it continously then I would carry it. On the other hand, I want positive money streams from the beginning…

My max negative would be about 1/5 of total incoming income…(Not sure if this is a sound number)

One Ideal scenario would be, if I can p/u something with multiple units, say 3 on a lot, and I can live in one and rent out the other two units and have the rentals pay for the total PITI or have a low negative to cover. Thus freeing up my money for more investing.

Your statement: “2. By passing on a property that had great potential because I didn’t want to suffer a little short-term loss.” Just keeps nagging me all day…

Here’s why: I am looking at several SF units in El Paso, TX that are about 100 bucks positive each (200 total), though not great at least nothing out of my pocket. One thing keeping me from pulling the trigger is the fact that TX RE does not appreciate much. SO I’m holding on to my downpayment money and looking for deals around San Diego which was hit hard during this RE bubble. I’m hesitate because the short-term loss of my down payment might cause me to lose out on something better…

@ Diane – you might want to substitute “gearing” with “cashflow”
e.g. negative gearing = negative cashflow and positive gearing = positive cash flow. Not an exact substitute, you might be able to find ways to apply it to your situation. Hope this helps.

thanks AJC!

Luis

By: AJC

AJC — Thu, 17 Jul 2008 19:45:06 +0000

@ Diane – Here’s the definition of ‘negatively gearing’ (which, just means that you lose each month on the investment because you borrowed too much): http://en.wikipedia.org/wiki/Negative_gearing

Positive gearing (a.k.a. just plain ol’ ‘gearing’) means the opposite: you have borrowed money to help purchase the investment (be it real-estate, stocks, of whatever) but you are making a monthly (or yearly) profit from rents/dividends.

This article merely states that neither is intrinsically ‘good’ or ‘bad’ as their proponents or detractors, respectively, would like to have you believe.

By: Diane Eats the Elephant

Diane Eats the Elephant — Thu, 17 Jul 2008 18:43:57 +0000

Sorry to say that I don’t quite understand what you’re talking about yet, AJ, but do agree about the cost of 70% just so US can pay 30% is not a good reason to go for something. Only if you were paying 100% anyway would that make sense (e.g., turning driving costs into a tax-deductible expense if you’re already doing the driving and can work it into a different scenario like sales, speeches, etc.). I’ll re-read. I’ve not heard the terms negative gearing and positive gearing and that don’t appear to be intuitive terms to me (where does “gear” come in?) Thanks for posting about this.
@Luis – thanks for asking about it, too!