Today’s REI Classroom Lesson

Steve Rozenberg explains what positive and negative geared properties are. He elaborates on why most investors only focus on the positive geared properties.

REI Classroom Summary

As Steve talks about, negative geared properties can bring in high appreciation if you’re willing to wait for the property to become hot.

Listen to this REI Classroom Lesson

Real Estate Investing Classroom Show Transcripts:

Mike: Welcome back to the flipnerd.com REI Classroom where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.
Steve: Hi, this is Steve Rozenberg with Empire Industries Property Management located in Houston, Texas. Today I’m here for the FlipNerd REI Classroom, and what we’re going to talk about is the difference between positive and negative geared property.
Mike: This REI Classroom real estate lesson is sponsored by theinvestormachine.com, FlipNerd’s private investor coaching program and your blueprint to investing success.
Steve: A lot of investors always want to know, first of all, what does that mean, and second of all, what is the difference between all the different types of investment properties. A lot of them you could boil down into two different categories. I would say first of all you have to decide what is your goal in investing. The positive negative geared, which I’ll explain in a second, will help you identify which path you want to go down. Or, you go down both paths.
A positive-geared property is a standard rental property that most people think about. It’s a three bedroom, two bath let’s say, positive cash flow property that is going to do standard appreciation. It’s going to go up in value slightly all the time. It’s a very cookie cutter type property. If you were thinking of baseball, it’s kind of like a base hit. It’s not a good deal. It’s not a great deal. It’s a good deal, but it’s not a bad deal.
A lot of investors, that’s what they look at. There’s nothing wrong with that because over time those properties will prove to be very valuable and will make you very wealthy. That is a positive geared property. The cash on cash return you could be looking at anywhere between 8 to 19 to 20%. That’s a pretty good deal.
The second type of property is what’s called a negative-geared property. A negative-geared property is a property that maybe costs more in value to purchase. You get less monthly cash flow if not negative monthly cash flow. Where you’re going to make your money on this is on appreciation. You make your money basically on the fact that it is going to go up in value and appreciate at a quicker pace than what a positive-geared property is. This is for people that maybe have extra liquidity. Maybe they are able to take a negative cash flow on a property. In the long term, they will make it on appreciation.
Obviously, we all know appreciation’s not guaranteed. If you were to take an area, let’s say a lot of areas that are in let’s say a downtown area that go up in value a lot more, most people, anywhere they are in the world they know an area that they say, “Man, I wish I would’ve bought 10 years ago in that area and now I just can’t afford to buy there.” The reality is you can afford to buy there because it’s just going to keep going up and up over time. It’s not going to go down. It may have a dip.
If you want to be somebody that buys properties, you have to first ask yourself, do I want a positive or negative-geared property. The first thing you want to ask yourself is can you withstand a negative cash flow scenario. There are some people that are very well off in their regular jobs and they say, “You know what? I don’t need the cash flow. That’s not important to me. I would rather get appreciation.”
I may buy, let’s say in Houston, Texas, I’ll buy a house that’s worth $500,000, let’s say over the course of 10 years it’s going to be worth $900,000 as opposed to a property that you buy for $150,000 which is kind of a standard rental. Over the course of time that $150,000 rental maybe goes up to $280,000 or maybe $300,000. You can see the amount that you’re going to make, the cash flow you would make never will outpace appreciation. That’s basically the difference between a positive and negative-geared property.
What a lot of investors do is they may buy two or three positive-geared properties and then they may buy one negative-geared property so that the positive-geared properties will offset the losses that the negative-geared property gives you. Again, this is just a way to counterbalance if you’re not looking, that you don’t need the money every month, that is a way to become an investor. Over time the negative-geared property’s appreciation will always win against cash flow.
This is Steve Rozenberg with Empire Industries with your FlipNerd Classroom REI. Hopefully this was helpful, and I’ll see you again. Bye-bye.
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Steve Rozenberg
I started off as an airline pilot for a major airline at 25 years of age in 1998 and after 9/11 and the almost certain collapse of the airline industry as we knew it, I felt I needed another path for retirement and possibly another income source to survive. That was about 3 years ago, today Empire Industries manages over 500 single family homes in the Houston area and we have had tremendous success with our business.
Steve Rozenberg

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