The Million Dollar Lab

Why Positively Geared
A rental property can be three things: Negatively Geared (Takes money out of your pocket), Neutrally Geared (Pays for itself and not much else), or Positively Geared (Puts money in your pocket)

If we take the view point that our rentals are a business, then we want them to make us money. And for a property to make us money it must make more than it costs, ie. Rental $ is greater than Mortgage, Costs, and Rates (Taxes).

This is not to say that Positive Gearing is the only way to make money out of property; Capital Gains often make negatively geared property profitable over time. The thing is, if we want to make money from day one and we want the security of knowing our deal is profitable; relying solely on capital gains is a little bit dangerous particularly if you are spending $100 a week to hold your Negatively Geared property.

It is true that Negatively Geared property offers some tax breaks, but in my opinion this is a matter of paying $1 to get 30c back. What a lot of people don't realize is that you can often set up Positively Geared property in such a way that you will also get a tax break while making money, this is done by claiming Depreciation on the property (talk to your accountant; most often they will recommend claiming depreciation). In this way you can make money and control the amount of tax you pay on the profit!

My First Positively Geared Property
I am only just learning this game of real estate investing and so far I have done two deals.

Deal 1. Buy, Hold, Sell; made a bit of money. (The Accidental Investor)

Deal 2. 3 Bedroom Rental House. Positively Geared :)

In Deal 1 I was the Accidental Investor. I brought my first house, hated living there, the market went crazy and I sold it (mainly to escape the area) at an excellent profit. That profit bought me my first decent motorbike, and allowed me several attempts at investing in the stock market (not particularly successful but worth a shot).

I learned a lot through making some money easily and then losing some of it. Plus the motorbike was heaps of fun and despite my mistakes I had enough left to have another go and get into the next deal.

The biggest lesson learned was that markets can turn nasty, and that relying solely on capital gains is silly and could make or lose you a lot of money.

So having decided that I was much more comfortable with property than the stock market, I formulated my new strategy. Simply put, it must make money from day one! This meant finding cash flow or finding something I could change to make cash flow.

The nerve wracking thing was that the market had crashed and to be honest I wasn't sure if we were at the bottom or still heading off a cliff. What I'm saying is there was still loads of opportunity to lose money.

In any case I knew I was looking for something that would make money on a weekly basis (not easy to find, but perhaps a little easier to find in a bad market) and at the end of the day it didn't matter what the potential sell value was as long as the rent paid all the expenses and a little bit of profit.

Solve a Problem and Add Value

With the help of a friend who is a wheeler and dealer from way back I found a little property that had been gutted inside and made into offices (opportunity dressed up as hard work). The Trust that had owned the two bedroom property had left it looking pretty rough and the real estate agent was having a hard time selling it. To make matters worse for the agent concerned the local banks were wanted to make any one interested in purchasing the property put down a 30% deposit due to the Commercial/Residential nature of the building.

Despite the rough edges I could see that if the place was painted, carpeted, and had a third bedroom added, it would be a little ripper of a rental property.

Problems to be solved:

1. Property was ugly Solution: Renovate
2. Only two bedrooms Solution: Add 3rd Room
3. Bank's & Finance Solution: Convince the bank it is Residential not commercial, and bring 2nd investor on board to make the bank a little more comfortable. Deposit reduced from 30% to 20%

The end result was a property with a rental income of $1083.00 per month and costs of $953.00 per month producing a profit of $130.00 per month.

On top of the cash flow we also re-valued the property and made a 20% capital gain despite the falling market.

Keys to Finding Cash Flow Property

1. Look at a lot of property. Even though prices have fallen, positive cash flow property is still rare, you need to know what things are worth and have your mind tuned in to spot a bargain.

2. Look for the opportunity behind the face value. What can you change to lift the value? A coat of paint is cheap, little things can go a long way. I added a room, carpeted, and painted for $11,000.00. Do the math it might not cost as much as you think to make a big difference.

3. Don't give up. The deal of a life time happens every day, it is just a matter of being in the right place at the right time.