How to get the right advice part 2 Negative gearing with low growth properties

How often have you been to a seminar or sat across the table from a Property Salesman and be told that negative gearing will save you tax?  On that basis alone people are led to buy properties that are often overpriced with  low or even negative growth and are losing money every week. However that’s supposed to be great because you have a tax deduction?

Sounds Familiar?

Don’t get me wrong there is nothing wrong with negative gearing because the government does not want to be in the housing business so negative gearing is an incentive for you to invest in property.

However the deal must stand on its own.

Negative gearing should be a benefit but not the reason that you do the deal.

In my opinion buying a low growth property and losing money for tax reasons is a dud. Imagine running a business that was always losing money. How long would you keep doing that for?

So getting back to seminars and salesman, they will often recommend House and land packages, because land always goes up faster than apartments or townhouses right and show you how you can buy 10 in 10 years?

Supply and demand determines capital growth and the strongest growth is generally in inner city locations of our major cities. The problem with house and land packages is that in most cases they are in outer areas where the capital growth is the lowest. If we look at outer areas of cities like Melbourne and Brisbane values have gone backwards. I will talk about the reasons why this is occurring in another article, however consider this:

You have two properties both at $400,000 and your only aim is to keep them for 20 years. So one is an inner city property growing at 10% and the other growths at 5% if we look at compounding growth, the difference works out at around $80,000 a year for each year that you own these properties over 20 years.

So the obvious question is which property would you prefer to own?

The answer should be clear and yet everyday people buy properties that lose money and are returning far less than 5% capital growth and they learn to late that low growth with low cash flow are not only a bad investment but will restrict your ability to further invest.

If you are looking at investing you do so for one reason, to create and build wealth. It should not be about the number of properties you have but the level of wealth that you have created. So when deciding where to invest do your due diligence carefully. Just do an internet search on capital growth in the suburb you are looking at but make sure that you are looking over say 10 years, short term figures mean nothing, they are often just a reflection of a slow or boom market. Figures over a decade will give you a far more accurate view on how your location really performs.

So remember if you are buying properties that are losing money and let’s face it many will, then make sure that your property will make high capital growth. Yes having a tax deduction is great but only for quality investments.