I cant believe my eyes. Some here are still advising people to try negative gearing. Did you not read Steves book?
What is negative gearing?
Negative gearing is a strategy that loses money rather than makes money. It forces us to work more hours not less. It limits how many investments we can own, instead of helping to grow our portfolio. It contains hidden tax traps. It is a wealth reduction strategy, not a wealth creation strategy.
NEGATIVE GEARED INVESTMENT – OXYMORON!
Let’s break this phrase down to define and understand it better: source: dictionary.com
Negative – Lacking positive or constructive features, especially unpleasant; disagreeable.
Geared – The use of credit or borrowed funds to improve one’s speculative capacity and increase the rate of return from an investment.
Investment – Property or another possession acquired for financial return or benefit.So what we have is a financial loss i.e. our ‘negative’ that is leveraged to magnify the return (worse loss). Some call this an ‘investment’ strategy.
For decades, shonky developers and seminar hosts have been fooling the Australian public into buying overpriced properties, by convincing them a loss is a gain. They draw on people’s natural dislike for paying taxes, and exploit it to their advantage. Apparently, losing money is a ‘wealth creation’ technique. Hmmm, I can’t say I agree there. It goes like this: You lose $3.00 on a property, guaranteed, and the taxman gives you $1.00 back. End result, you lose $2.00 overall. Wow! Sign me up, I would love to ‘invest’ by losing $2 out of every $3.
Negative gearing forces people to stay in their job, because this ‘investment’ is actually losing money, and if they don’t fund the shortfall every week, it’s hello mortgagee sale. And that’s if they only have one property. If they have multiple properties, the pressure is enormous. Tax deductions have been used as the motive for investing, when they should only be used as a consolation prize. People are so preoccupied with trying to save a dollar in tax, they do not realise they are throwing away three dollars in the process.
John has disposable income of $200 a week, as does Bob. John buys a negatively geared property that has a cashflow shortfall of $100 a week. Bob buys a cashflow positive property which has a cashflow positive surplus of $50 a week. Six months pass, and John has $2,500 extra in the bank while Bob has saved up an extra $6,250. Both decide to buy similar property again. John buys another negatively geared property that has a cashflow shortfall of $90 a week. John now has a surplus of only $10 a week out of his $200 disposable income. He can no longer afford to buy properties. Bob however buys two cashflow positive properties because he has saved up enough to buy two properties. One property has a cashflow positive surplus of $40 a week, the other has a surplus of $50 a week. Bob now has disposable income of $200 + $50 + $40 + $50. He can now save $340 a week, which means it will not be long before he can afford to buy another property.
John is a typical Australian. He bought two negative geared investment properties then found he could not buy any more. While John eventually made money in a property boom eight years later, Bob has become a millionaire and retired.
Crashy,
I think you have over simplified this argument to suit your viewpoint.
There are advantages in negative gearing and I can point you to people who make very substantial profits from buying and holding prime growth real estate with no likelihood of positive cashflow.
You are very correct about the follies of buying with the sole aim of making a tax loss. You are wrong if you believe this is the sole aim of all negative gearers.
I think an educated investor needs to understand the different avenues available and decide their path to wealth.
I know that this great forum is very popular with pos cashflow fans and I hope I haven’t ruffled too many feathers [^]
Have a great weekend Crashy!
Simon Macks
Mortgage Hunter
[email protected]
0425 228 985well described crashy,
I notice also couple of people are saying to buy -ve property.
I think people can buy +ve cash flow and capital growth both in the property if find hard.Cheers
AmitI agree with you Simon. To say that negative cash flow is an overall bad strategy is, in my opinion, wrong.
I agree that chasing a tax benefit is definitely the wrong investment strategy – but that doesn’t necessarily imply negative cash flow strategy.
Not everyone wants to achieve the same goals. If you have plenty of income and want to generate wealth then high growth property is the way to go. If you want to replace earned income with passive (not truly passive though) income then negative cash flow property is not going to work.
Don’t be blind sighted and ignore other strategies.
Cheers
Stu
Crashy,
Negative gearing has its place.
It is great for higher taxed people especially self employed.
Why just give that extra tax to the Govt??
I’d rather pay off a house that will gain in value, than giving XXX thousand to Little Johny. He gets enough.
Oh, I don’t have any negative geared ppty. Only positive. I’ve been tempted because of the tax issues, however, it will restrict my positive cashflow purchases. That to me is the worst thing about negative geared ppty. The banks stop lending to you.
Just an amateur’s opinion.[
]Del
Hi all,
I must admit I too take the majority view the negative gearing has its place. Not everyone has the viewpoint that a good investment must soley produce income from day one. Do the best shares pay the highest dividend ? …no, not all of them. Same in property. The best property doesnt have to be positive cash flow. Everyone has their own stratagy and goals. To write off one or the other as no good is not smart investing…. horses for courses ….Hi all,
To summarise, -ve gearing is a long term strategy. It suits people who are content to keep working and wait on growth rates. It all comes back to what the investor wants and when they want it. I personally believe in Steve’s view that for an investment srategy to be successful it must be able to replicate in order to be effective.Andrew
Hi all, I know I’ve appeared to be a bit of a maths nerd in previous posts, so.. no dang it I’m going to do it again[
]
Negative gearing to me is just pure maths. I’m not “chasing” tax benefits, I’m simply entering all tax effects, income and costs into my computer, and fine tuning my exposure to negative gearing to just keep all my properties slightly cash flow positive after tax. I enjoy my job, and I can’t afford to be too distracted with my properties, so what I did was just buy enough of them to keep the numbers working in the maximum tax bracket. I also synchronised capital gain from shares with the initial maximum depreciation effect.
So far I’ve averaged about $20 to $30 per week for each property after tax for the last 5 years.(they were all initially about 6.7% gross rental return, however, which is a bit harder to duplicate now.) My capital gain (on paper) is roughly about $400,000 which isn’t bad for an investment that has required so little of my time.
Basically I’m saying that negative gearing is ok if you know what you’re doing. (and you want to keep doing your job!)
Jim.Hi All.
My view is to do a bit of both + & -. Sally and I have been thinking about selling our house in Sydney and buy negative cash plow prop off the plan in Sydney, at the same time, we would also buy +ve out in the country, just to balance it out.
In Sydney we intend to hold property for atleast 10 to 15 years. Out in the country keep all +ve props for much longer.
We expect that the Sydney properties will have a better capital groth rate than the country props, so thats the reason for -ve cash flows in Sydney.
If there were +ve cash flows in Sydney I would be the first to jump at it.Andrew[8D]
I live in Melbourne. To buy +ve geared proeperties, I have to go either interstate or rural. My choices are to buy 3 properties in some little rural town somewhere for $100k each or one place in Melbourne for $300k. The rural town will probably return $450-$500 per week. The Melbourne property will return maybe $260 per week. That is a big difference in revenues. But supply and demand dictates that the propertyin Melbourne is likely to grow at a faster % rate than the rural property. Yes I am foregoing revenue now in rental, but in the rural area I have to try and keep three tenants happy, in melbourne I will only have one tenant. In the rural property I am more likely to have vacancy more often. Population in Melbourne means I can lower my rent to $250 and am likely to fill it fast.
+ve and -ve gearing are following different strategies. I am still very much a supporter of -ve gearing because I’m getting extremely good capital growth in the big city whilst still getting a nice cheque back from the tax man. The tax benefits are exactly that, just a benefit. You do not buy -ve geared property purely for a tax deduction. It’s because you are thinking of your long term strategy.
Well Crashy, most of my properties are -ve geared BUT +ve cashflow. Each one is putting a little into my pocket each week and have had very good capital growth. So where is that wrong? I have a long term strategy and so far it is working very well, I am happy. Each to his own!
hi all
jan somers…………negative gearing
margaret lomas……..neg geared/positive cashflow
steve mcknight……..positive gearing
all of the above have done well before they published their books and got exposure.
regards
alfFester
“most of my properties are -ve geared BUT +ve cashflow”
And just how do you get negative gearing from positive cashflow? I think you forgot that negative gearing requires a ‘negative’ part.
All you bunnies who think neg gearing has advantages, STATE THEM. Provide worked examples. Give us evidence, not opinion.
Fester“most of my properties are -ve geared BUT +ve cashflow”
And just how do you get negative gearing from positive cashflow? I think you forgot that negative gearing requires a ‘negative’ part.
All you bunnies who think neg gearing has advantages, STATE THEM. Provide worked examples. Give us evidence, not opinion.
I think we are talking cash positive but with a tax loss due to depreciation of building/fittings etc.
Am I right Fester?
Crashy….re negative gearing; think shares m8
you buy 1000 share of xyz at say $30, margined with a lvr @ 70%, so your cash outlay is $9000-toatal value of position $30000
Interest rate is say 7% and the dividend is say 3.5% grossed up……you are negatively geared, right?
One year later the share is trading @ $35…..(and we flogg that sucker, locking in our profit[
][}])capital gain = $5000
dividend = $1050
interest = $1470Total Profit = $4580 …..51% return on capital thanks very much.
All relies on capital gain though which will be harder to come by in property imo, but thats how it works. Very simple and in the last 4-5 years its been like taking candy from a baby.
Genius is a rising market!!![
]Cheers
Wayne
I think an overall positively geared portfolio works.
a la what richmastery teach. With a mix of different kinds of properties.Wayne
Thanks for your example, but you didnt really answer the question. I need to know what the *advantages* are. Negative gearing can make money, but I need to know how it can be *better* than positive gearing. If it isnt, then there is no advantage. In your example, if the div yield was 8%, that would make it positively geared. I cannot see how the negative geared example is better.
Nobody has said that you cannot make money by negative gearing. Its just that you can make a hell of a lot more by positive gearing.
“I think we are talking cash positive but with a tax loss due to depreciation of building/fittings etc.”
If you are receiving positive cashflow, but claiming depreciation, capital growth is obviously not your goal. Claiming depreciation reduces the capital base, which increases the CGT upon sale. Unless you dont plan to sell, in which case shouldnt you be worrying about rental yield instead? Secondly, this method sounds more like neutral gearing than negative gearing.
Crashy,
Firstly, I have no position on which is better, – or +, was just using shares as an example. And just for the record, I don’t like negative geared property investment for my PERSONAL circumstances, so I am going a fair way in agreeing with you.
But for certain investors negative gearing can be a fabulous wealth buiding tool.
Going back to my share example: Lets replace xyz with COH-Cochlear. This company if leveraged with margin lending would never have been positively geared. But imagine if you had puchased COH @ $2.50 and margined it when possible…adding aggressively to the position as increased equity allowed……HOLY SMOKE i’m not even going to do the calcs because I will kick myself for not doing it[
] but it would be in the 100’s% if not 1000’s% return on investment.Better than any high div stock that I can think of!!!
That being said, it is possible to have found high dividend, relatively high growth share as well.
This of course is far more difficult in the property market.
Generally, if there is a high expectation of capital gain, the relative yield will be lower, as you will be paying a premium, just as in shares. How much premium is of course the key issue.
A nice piece of negative geared property, at the right time in the cycle(NOT NOW) at the right price, in the right area(say beachfront or similar) for the right investor, would be a wonderful investment and hard to beat with positive geared property.
Again I re-iterate I wouldn’t do it myself cause it doesn’t suit my personality or circumstances. I prefer to do the same sort of thing with shares for a host of different reasons; ah la my example above.
Horses for courses
Wayne
To say that negative gearing is not a wealth building tool is silly. It is not for all, but should you be earning income in the top tax bracket, then it is highly desirable to negative gear to reduce you tax. Steve’s reasons for not negatively gearing are valid, but it must be remembered that the majority of people who have made money in property have done it by negative gearing. Especially in the last couple of years with the property boom.
The keys to negative gearing is that you are relying on capital growth in your asset. So it is ideal to buy in a good area and land (not units like all those con men try to sell you such as Meriton) as that appreciates the quickest. If you don’t have capital growth in your property then you will lose money.
Positively geared property is good strategy, but you must remember that is you can’t get a tenant to pay rent then you will lose money.
Personally for me a combination of both positively geared property and negatively geared property is ideal. It gives me diversification (not just relying on one system), so that I am not soley relying on either rent or capital growth to succeed.
Hi All
I think that many people are being fooled into believing that +ve geared IP’s are not risky. I think that both +ve and -ve geared IP are risky and that the level of risk although similar in some respects can be quite different. -ve IP is very much more likely to always have tenants through highs and lows in the cycle but +ve IP are much more susceptible to the cycle in my opinion. Since +ve IP’s became so popular we have not had a property cycle downturn. When we do experience one it may be accompanied by a jobs downturn. A jobs downturn is likely to be more pronounced in rural areas and there could well be a large move out of these towns into the cities to find employment, I call it “ghost town syndrome”. If this happens then I would think that vacancy rate would increase and make life a little more uncomfortable for the investor. If it became too uncomfortable then one might be forced to sell and with a net population outflow from these towns that may be difficult. In conclusion, I think that a balance is good. Some -ve and some +ve IP’s, not just one or the other. We all know that -ve IP will more than likely produce a bigger profit on sale and that +ve IP generates a stream of income which can be used to finance other IP’s but dont forget the risks of a downturn. Anyone who back just one horse (i.e +ve or -ve IP) is open to much greater risk.Crashy at the risk of sounding like a broken record let me reiterate:
Time value of money reduces the effect of depreciation reduction of your cost base. Also I still haven’t received a sensible answer on whether depreciation of fittings reduces your cost base like the div 43 building depr’n.
PLUS: You only pay tax on half of your CG!I would like to see a good analysis of typical +ve and -ve properties with the full tax effect involved, and what would really be interesting is to include a value for our time in the comparison. As I stated above, my input in time has been minimal. I’m sure I would have spent a much larger amount of time in securing an equivalent amount of +vely geared properties. I value my time at at least $23 per hour, and that’s not including travelling costs.
Jim
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