I found this very cheap house for sale in town. It's not a good area but there's potential for capital gain due to the mining boom (even the worst house in town had tripled in price in the last 2 yrs!). Asking price is $170K (can hardly find anything under $200K nowadays) and currently tenanted. When I asked the vendor how much is the rent per week she replied, "There is about 8 months left on the lease and they pay $140/week. Which is well below what it could be but I did that for tax reasons." Now the big question is, why would someone want to turn a potentially cash flow positive property into negative gearing? So I wrote her another email telling her I'm only interested in cash flow positive property and why would someone want to spend $1 to save 48.5cent tax, it doesn't make sense since it's still a loss, and I suggested her to read Steve's books. This is her reply: "I have read it and I only purchased this particular property for capital gain. Hence why I am selling it now. I've other properties that I keep and will use this money to ensure the others are cash flow positive. I'm a mortgage broker also studying to be a valuer. This property can be positively cashflow but that is not my interest in it."
I'm only starting out in property investment and still learning. I still don't get it why is she doing this. Is she lying or am I missing something here? I'll call a few real estate agents tomorrow to find out about the average rental in the area.
Any input would be greatly appreciated. Thanks.The problem here is the house has already tripled in value in the last 2 years. You've missed the boat to a large degree. There may not be a lot of cap growth left in the town for a while; it's hard to know.
Personally, I wouldn't believe her story; no-one willingly loses money like she is, unless they are financially illiterate.
There must be another hidden agenda there somewhere; maybe her relatives are renting it on a very discounted rate and she can't put up their rent.
I'd rather make a profit and pay some tax on it, than lose some money in neg gearing every month.
It would be smart to do some further digging on the property to find out more about it, and also the relative values of similar properties in the immediate area to establish it's real value.
If it turns out the rent should be much higher, it may be a good deal, but remember you won't be able to put up the rent until the current tenant's lease runs out, and/or the tenant moves out.
The only circumstance where I would want a property to be neg geared is when there is strong evidence that there is likely to be a fast and very substantial cap gain to offset the neg cashflow, or I could turn the property into a pos cashflow AFTER TAX scenario. Even then, it is really only a prediction and not a proven outcome that the cap growth will occur, so for me neg gearing is not an option.NEVER !!!! … but that's just my opinion ..
I'm only starting out in property investment and still learning. I still don't get it why is she doing this. Is she lying or am I missing something here?
I don't know all the answers, but how long ago did she purchase the property? What if she purchased 2 years ago and by your statement she only paid $60,000 for it then $140/week is not a bad return on her investment but not good on the new buyer at $170K. You would buy better closer to a main City somewhere.
LA Auzzie says,
I'd rather make a profit and pay some tax on it, than lose some money in neg gearing every month.Not sure that lose money on neg gearing is the correct terminology – isn't it just contributing to saving?
Jon
sometimes there is a need to hold properties in high growth areas for capital appreciation benefits. These properties tend to be negatively geared and can be balanced with positive gearing from other properties in your portfolio.
Now to WANT to make your property negatively geared???? That's like asking when would you WANT to delibrately lose money on an investment strategy. MY answer ……………….NEVER!!!!
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