Negative Gearing Can Be Like Treading Water

When I started investing in property, the only strategy I knew was negative gearing.

10 properties later and I knew I needed to change the way I was doing things.

I needed to balance the strategy and mix it with cash flow. Eventually I worked it out, but it took some time, and some tweaking.

Anyone feel this pain today?

MTR

 

Nope.

NG is the best

 

If NG were a woman I can just picture her. Low cut, short skirt, high heels and fish nets. Simply irresistible.

 

She pays for your outings, then ruffling through your wallet while you're in the shower and takes it all back plus extra. But it's ok, some shady government dudes give you 30% back on what she stole the same every year.

 

hang hang on guv...last time i was in the Druie ...i saw nutin of that sort just trackie dacks ad loose jeans with muffin tops everywhere...you getting to Northshore and Eastern suburbs are you Datto?

i though they would arrest you on sight....aroun dem parts based on your rep

 

Or you picture a guy in stubbies bending down to pick up 50 cents

 

Druie style....

 

Ask Wategos.....

 

Ahhh that would be the vision of a wanna be first home buyer who can't quite make the deposit.

 

For me it's like treading water, but in a depth at which I can stand up anytime and walk out.

What were the primary drivers for this: looking to increase passive income to live off, or improving serviceability for further IPs? Or both?

 

Depends on your income.

A Mom and Pop family can't afford to carry too many NG properties.

Only very high disposable income earners love it.

 

How many properties can you hold if they make money?

How many properties can you hold if they lose money?

In business cash is king - I struggle why it is different for investors.

I think the word "negative" in "negative gearing" is a hint.

 

interest rates rising, at the time hitting close to 10%, a killer when you own multiple properties.

Change in lending criteria, low doc/no doc abolished/gone, could no longer access equity

Reduction in income/salary

All the above lead me to realise my strategy of buying purely for growth was no longer going to cut it. Needed to find a solution where I could achieve both

 

Even so, I believe this strategy is flawed because many variables can come into play, life happens. ie loss of job/income, health, interest rate rises etc.

Also rents do not continue to rise as many think, when markets correct we can also see rents fall back significantly which is what we are seeing in Perth at the moment, it can happen to any market in Australia, dependent totally on supply

 

Very good points raised. I think now with all the recent changes that are happening at the moment with the lending criteria and the banks increasing their rates for investors, strategies need to change! Most new investors that are starting out today will not be able to replicate some of the strategies used by the mature investors in SS with having multiple negative geared properties. I have been fortunate in that, several of the negative geared properties are not negatives anymore due to rental increases over time for it to catch up. I know some friends of mine that are equity rich but they can't service and unable to extract any equity out.

Like I've said in previous posts in SS, I am at that stage where I want to renovate some of the current IPs to maximise my rental returns and make it appealing for future tenants to minimise time on the market, garage to granny flat conversions to maximise rental returns and get out of niche lenders and back into the top 4 banks for some loans, and consider buying in areas where the rental returns are higher, but forgoing big capital growth potentially.

I am also concerned with what may happen in the future with the Fed budgets because next FY, we lose out on things such as travels/ inspections, changes to depreciations and etc.

 

Given that you have fairly large & mature portfolio would you not consider just taking a pause? Doing GF may lead to over capitalisation and may narrow your sellers base. On the other hand its situational, right value add at right place should be fine.
My thoughts are in 18 - 24 months the lenders will break ranks.

 

It's interesting how often experienced property investors confuse two very basic concepts.
One is negative gearing - which is a tax calculation.
One is cash flow - which is a $ calculation.

You can negative gear a property and remain cash flow positive.

Don't confuse the two concepts

Blacky

 

Not if you are out of pocket

I dont know too many investors who hold -ve properties that are truly cash flow positive

Depreciation when IP sold is added back

We are in low interest rate environment, not the norm, tack 2-4% to current IR, how many will be cash flow positive?

Look at forum investors, a big shift.....investors are now chasing shares at maybe 6% if lucky?

What do you think average resi yields are today ? 3 or perhaps 4%

 

For your average mum and dad investor, negative geared property is just an enforced saving plan. It's only an issue for people planning large portfolios. stats show most investors only own one IP.
So what if you have an IP that's negative by 100 bucks a week for 10 yrs... that's cost you 50k to hold, meanwhile your tenant paid the majority of your loan and your still way ahead.
No need to bash the strategy when it's a pretty simple effective method for people who want to retire with one or two IPs. It won't make them rich but it will guarantee they never end on the pension.
Not everyone plans to get rich off property - many just plan to not be as poor as the previous generation.

 

Seems to be a common misunderstanding.