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Creating wealth with no wealth

I’ve been to an investment seminar where the benefits of being a collector of properties were shown to me. There were people there with 20 properties and they did not start off wealthy. Do you think this is a strategy to get wealthy or are these people heading for a fall?

It depends how they have bought their properties. If the properties are negatively geared then it can be a risky play that can or might not pay off.

For example, if the properties were on five-year fixed interest home loans and the areas they bought the property have experienced capital gain as well as rising rents then they could be a good position. Also, they would need big incomes – really big for 20 properties! – and the tax losses from the negatively-geared properties would bring their tax bill down.

On the other hand, lots of the people with a big portfolio of properties have them positively geared. These are usually cheap properties where the rent is bigger than the interest costs and the other expenses of being a landlord. These places go up in value slowly, generally, but in some case they can surprise on the upside.

There are websites that list properties that could be positively geared, such as the Yahoo! search engine.

Finally, there’s another way of buying property called positive cash flow. Imagine a property where the rent you can collect is $500 a week or $26,000 for the year, and your interest, real estate, body corporate and maintenance costs add up to $30,000. This would give you a $4000 loss for the year on being a landlord. By buying a newish apartment, you can maximise the claimable depreciation tax deductions and these, if they are greater than $4000, give you a tax refund. This will turn a negatively-geared, loss-making apartment into a positive cash flow property. People use this technique to build up their holding of rented properties.

For advice you can trust book a complimentary first appointment with Switzer Financial Services today.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Published on: Wednesday, July 28, 2010

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