Can your house be positively geared? The short answer is no, the longer answer is yes and let me explain why.
Your house can actually be positive cash flowed and increase your monthly cash flow in two main ways. We will cover those methods in this article. We will also look at whether or not your house can in fact become an ‘asset’.
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Robert Kiyosaki is very famous for his book Rich Dad, Poor Dad where he proclaims “You’re house is NOT an asset”. By making that statement he meant to say that your house is not positive cash flow and actually costs your money each month. On the surface he is 100% correct, but there are in fact ways your house can either produce cash flow or put you in a situation where your available cash flow is increased.
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Your house can either produce a positive cash flow or put you in a situation where your available cash flow has increased because of your purchase of that property.
I’m going to look at those two things – producing cash flow and improving cashflow – so let’s look at number one:
Producing Cash Flow
Producing cash flow a house can make your house positively geared if you rent out part of that house. By that I mean you rent out the entire house, or you can rent out some rooms of the house, or you might have a granny flat out the back that you can rent out to produce cash flow.
This cash flow is coming into your bank account and if that cash flow exceeds your expenses on the house then it’s obviously positively geared. If the cash flow does not exceed the expenses on the house then no your house is not positively geared.
Improving Cash Flow
The second way a house can improve your cash flow is by minimizing your costs.
When you run a business, there are two ways to increase your profits – you can either generate more sales or you can lower your costs. When we discuss improving cash flow we are talking about lowering your costs.
We want to look at the cost of renting a property versus the cost of living in a property that you own.
Let’s say you live in an area where renting a three bedroom house costs you $400/week you would be paying that $400/week anyway (you can’t be homeless!). If you can purchase a house where your repayments on the mortgage and all of your expenses come in at less than $400/week well you’re actually ahead $50/week and you’ve improved your cash flow.
Even though your property is not technically positively cash flowed it is having a positive influence on your cash flow.
So you need to look at whether or not you want to move into a house that you own and whether it’s going to improve your cash flow or not.
In the high a dollar areas, where it’s more expensive to buy a house, this will not tend to be the case. But what will happen is that over time you will begin to get ahead.
Let’s say you buy the house now and you’re paying $600/week in mortgage repayments and expenses instead of $400/week. You are immediately $200/week behind where you would have been.
However rents tend to go up and over time and you can pay your mortgage down. Let’s say that in ten years time rents in the area have gone from $400/week to $800/week. You have also paid down some of your loan and you refinance your loan and your payments on the loan (plus other expenses) is now $450/week.
You are now $350/week ahead of where you would have been if you were renting.
Assessing Whether Buying A House Can Improve Your Cash Flow
You need assess your particular property and see whether you can rent all of it or a portion of it out to create a positive cash flow. This is the ultimate in positive gearing your house.
For most of us however this won’t work out. For you, you need to assess whether buying a house will improve your cash flow situation and then you can look at it subjectively.