How about some comments on this article..
Negative gearing is risky and to be *avoided*- the money you have lost in paying the extra interest for the negatively geared property must be taken into account when looking at your capital gain.
If the capital gain realised upon sale does not cover the interest losses and inflation rises you have doubly lost on your investment..
[u]EXAMPLE[/u]
Property purchase price $100 000
Borrowings $ 80 000
Interest over 5yrs @ 10% ($8’000×5) $40 000Property sale price $130 000
Capital gain $ 30 000
Loss (interest-CG) $ 10 000
5 yr inflation ( $100×114.7/100.9)= $ 13 677
Your LOSS after inflation $ 23 677The $10 000 loss is bad enough but when you consider that inflation has taken $13 677 from the value of money at the same time, youy are looking at a loss of $ 23 677, evenn taking tax benefits into account ( maximum of $4850) you are still losing money, not much of an investment strategy
]Yack ?
REDWING
please note i’ve done well from – geared property, with growth of late, they are now + geared, just throwing this topic up for discussion, inflation is also a factor in investing…“Money is a currency, like electricity and it requires momentum to make it Effective”
Redwing,
A capital gain of $30k over 5 years? don’t you think it is quite low?
Interest over 5 years $40k, where is the rent over 5 years. Does it mean the property is sitting there vacant for 5 years? I don’t think so.
What about tax deduction from depreciation schedule? it does not mention at all in the article.
Over $13k of inflation, I think it’s not too bad.
Warm Regards
Chan Dollars
[The bridge between where you are right now & where you want to be tomorrow is knowledge]Redwing, I’m not yack, but I only woke up a few hours ago, and I’ll be up all night, with you and Bec as my only company- deja vu!
I see an investment as me putting money in… the way I figure it is that my tenants will eventually pay off my IP’s from rents, but meantime, and if I want to pay it off sooner, then I can invest my OWN money, and I will own something of great value- paid off by tenants, myself and the great tax god. Funnily, I never really got past the Somers way of investing.
I have no problem in putting my own money into property- it’s why I work. I think if we get obsessed with CF+, then we will end up with a bunch of dodgy houses- sure, they will be paid off more quickly by tenants, but at the end of the day, I want to be able to feel proud of my purchases- you want 1 picasso, or 1 million pro harts?
kay henry
Originally posted by kay henry:I want to be able to feel proud of my purchases- you want 1 picasso, or 1 million pro harts?
kay henry
[8D]Picasso just confuses me, i think he was ‘on’ something, Pro-Harts, i wouldn’t mind one seriously as an investment, it’s on my list..
Hi Kay and Chan$
[]Found the article in a library book – “residential real estate investing- a beginers guide” by Clifton Thornton
Just thought i’d throw it up as a debateable topic[}
]Me i see the value in both forms of gearing ( nuetral gearing being just a transitional and tempory phase )
But with + geared properties i’d agree, your due diligence would be paramount, i’d purchase in a place with ‘some’ hope of CG and a improving population, as i’ve been through some small towns with many empty houses.
CHAN$
My thoughts too.. the point of negative gearing is the benefit of recieving the tax portion back etc, no depreciation or tax benefits included in this *example*
I’m actually starting my second read of Steve’s book and waiting for my upcoming 5 days off, got some properties to visit !![
]REDWING
“Money is a currency, like electricity and it requires momentum to make it Effective”
Redwing,
I just finished my 5 days off was trying to finish of paper work from current purchase. The 5 days off is not enough coz friends from UK was around for 4 days and need to take them around.
Will be back to work next week.
Regarding -ve gearing, not looking at it anymore coz no money to support it.
Warm Regards
Chan Dollars
[The bridge between where you are right now & where you want to be tomorrow is knowledge]Know what you meen CHAN$
sooner or later if you want to progress with IP’s you have to seriously look at + cash flow properties, granted you will mainly look at those with some ability for CG ( just makes the search harder, and, more fun )
or, wait for some CG in your current properties [
]REDWING
“Money is a currency, like electricity and it requires momentum to make it Effective”
Redwing
The example you gave does highlight the downside of a negative gearing strategy. Success with negative gearing is contingent upon astute selection of property among other things. The example you gave would be typical of a poor investment, be it due to poor location, lack of desirability etc. In fact it sounds like one of my early investments (still got it.)
This is where successful negative gearing requires much research and groundwork, just like successful positive cashflow investing.
Just as the book says, capital gains cannot be guaranteed. To my mind neither can cashflow from rent. Just because somebody pays good rent now does not guarantee they will pay next year. Having experienced the change in demand when a resource company decides to “downsize” in a regional town has taught me that lesson. Suddenly my +CF property was zero CF property and worth substantially less.
I have had the same experience with commercial property, business folding and 9 months vacancy tends to dent the cashflow a bit.
My point is there are no guarantees and no one right strategy. Choose one, or more, and do it as well as you can and I am sure you will succeed.Regards
SMTM
I notice your example does not allow for any rent – so that should certainly reduce the Interest paid less capital gain and effects of inflation.
But the Biggy to me is – What your income was 5 yrs ago to now and compare it to what is owed.
As I work full time in a professional position, I like to compare my current salary to what is owed. And value of property.
eg. Income 5 yrs ago $60,000 Amount Owed $80,000 Value $100,000
Income Now $80,000 Amount Owed $80,000 Value $130,000Now look at it in another 5 yrs.
Income $105,000 Amount Owed $80,000 Value $169,000So as you buy and hold the amounts owed seem lower in comparison to your income and value of property.
As Jan Somers says – the key is time in the market.
If I can buy another property every 2 years, I am happy.
Sure I could do more, subdivide lots, extensions, renovations etc. But I dont have time at the moment. Once a decent portfolio is amassed I can do more of those things.
yack, you said:
“eg. Income 5 yrs ago $60,000 Amount Owed $80,000 Value $100,000
Income Now $80,000 Amount Owed $80,000 Value $130,000Now look at it in another 5 yrs.
Income $105,000 Amount Owed $80,000 Value $169,000″That’s easy enough to say in a RE boom, but remember, properties in say, QLD, didn’t really rise much between 1990 and 2000. In fact, given the two-tiered marketing, prices were overvalued and dropped during that time.
Your assumption is that prices rise 70% over the ten-year time period. But recent history was not that at all. Some of the two-tiered people are just getting their money back with a little profit- that’s on places bought in the late 80’s/early 90’s. I almost did that too- watched the video, but was too chicken. [?]
Whilst I believe growth properties are great (who doesn’t?), I think we need to not only look at the *current* cycle, but at previous realities.
So for example, would I project a 70% growth onto a docklands property in 10 years? I don’t think so, but please correct me if I’m wrong in ten years [
]kay henry
I am not talking about two tier properties. They distort the market.
Historically properties douuble every 7-10 years.
Ok. We have seen great growth of late, so the next cycle may take alot longer. But I still expect properties to double in 10 yrs time – even docklands properties.
But can you wait 10 yrs. Property is a patience game.
Yack, I’ve been trying to find this article on two-tiered marketing that I recall had figures of nearly 50% of properties in the Gold Coast being tt-marketed in 1998. Found it!!
The article is written in 1999, so it’s slightly aged, but it shows the incredible amount of tt-marketing in Australia at around that time. I know it’s not fashionable to discuss that form of marketing, given that we’re now in a RE boom, but I’m sure if you speak to some investors who bought property around that time, you’ll find it was rampant.
And yes, I’m in for the long haul. I’ve been doing it for 9 years now- it’s not a lifetime, but I’m only 37- gimme a break ;O) As with desiderata, never compare yourself to others… there’s always lesser and greater…
kay henry
Kay Henry
<<<never compare yourself to others… there’s always lesser and greater… >>>
I try not to compare myself to others. I once tried in trying to get a payrise. My boss effectively told me not to compare myself directly to others, so I have always, since then, tried not too.
I am a similar age to you and been in property similar to you as well. I dont know all but just want people to exercise some caution. I am sceptical about rural properties. Like the two-tier stuff the property boom has hidden alot of problems.
Hi All
Agree with the time in the market comment.
I’d alway’s liked the axiom “don’t wait to buy real estate, buy real estate and wait”
Yack, i look at real estate doubling in 10-12 yrs, bought my first IP in 1990 and regret selling it 8 yrs later, knowing what i know now i could’ve and should’ve kept it, and the next…
I’m glad i fixed my rates a while back as this suits my comfort zone. IP’s have achieved nice CG as has PPOR, i believe there’s still some bargains in my parts of the woods, and look forward to the next purchase, trying to obtain the best mixture of Capital Growth, Risk and Cash Flow that i can..
My belief, is that there are still some good buys out there, areas that haven’t realised there potential yet, things may stay flat in some areas, yet in other areas depending on what projects are underway great growth may still be coming, no crystal balls so can just give an educated guess..
[^]REDWING
“Money is a currency, like electricity and it requires momentum to make it Effective”
Cash in $20000
Inflation 13.67% = 2734
Cash out after paying loan $50000
Profit $26266Still fairly simplistic calculations as does not take into account costs on purchase and sale and any additional cash put in during the 5 years.
However, in my view your investment’s ability to beat inflation depends on what your cash investment is
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