Negative Gearing - Whats all the hype?

So still a newbie and looking for the right first IP to purchase. After running numbers with our accountant, who has many property investors on his client list, the tax rebate is not what I'd expect. Our strategy is buy and hold, so yes the capital gains is the fruit. But the cost of holding and minor tax benefit is not what I'd expect. Or am I looking at this wrong and its about scale and time, 5-10 properties over ten years or more? Being capital gains - cost of holding = profit.

 

I think you are missing GROWTH. This occurs with time and patience. Growth also allows you to releverage that growth if you can access that equity to buy another. Many lenders will allow 80% of equity.

Property allows you to leverage investment growth. For a $60K outgoing (deposit + fees) you now own a $500K property. If it doubles in value you have achieved wealth improvement of $500K. And of course rents will be based on a $1m property so income grows but costs dont.

The neg gearing and tax refund are merely part of the calculation of costs to service.

Run the numbers using our estimator tool and it will show the weekly cashflow cost after tax etc. Then consider what happens with modest growth. Say 15% over 8 years. Now what happens if its 40% ?

You could look at the old Somersoft PIA software. It helps model these issues

 

Depends. What were you expecting, op?

 

Thanks Paul yes growth is the focus for us, I'll run the numbers on your excel.doc

 

Well the catalyst for us starting this journey was another account said, you pay a lot of tax, you should buy a neg geared IP to get it back. But the get it back portion is not that much. Obviously this is no longer the driving factor in our strategy.

 

Yes I worked that out after week one of being on this site.....but hey, it got me started so that's a good thing!

 

You are probably looking at the wrong type of property. If you are not negatively geared too highly by being able to achieve good rent, build or buy new town houses with low land component you can get depreciation and new build allowances that will give you positive cash flow and save on land tax and maintenance. Investing in property is investing in time, time can increase your loses, or increase your gains with increasing velocity.

 

The tax benefit never offsets the loss (with the possible exception of a furnished new build in year one two and three due to depreciation).

And if you go through a long period of price stagnation you are losing money. You are betting on growth.

The words “negative” give you a hint.

 

Point being something doesnt meet your expectations doesnt mean anything, becaus

How much were you expecting to get back and what do you mean? A refund? How did you calculate your expectation?

 

@Herluf, I find buying property is a scary thing (especially the first one) and, being a “numbers person”, I will crunch them until I am on the verge of “paralysis by analysis”.

So, I will share with you the numbers with the purchase of our first IP. Like you, we are B+H investors, just a wee bit older (we are retired).

Purchase June 1992

Price: $125,000
Costs: $4,139
Total: $129,139
Loan: $125,000 (borrowed full price)
Interest Rate: 9.90% IO
Rent: $165pw (yep, it was NG)
​

Now, 27 years later

Value: $650,000
Loan: $254,830 (increased to buy more IPs)
Interest Rate: 4.29% IO
Offset: $254,830
Rent: $465pw (yep, it is PG)
​

So, for an initial investment of $4,139 we now have an asset worth $650,000 and we are being “paid” to own it.

Over the 27 years, I have NOT kept track of the negative cashflow, the tax refunds, the positive cashflow, etc. TBH, I couldn’t give a tosser .

We are still not paying tax on our property portfolio as it is slightly NG. The equity created in the above IP plus its income has helped us buy other IPs .

That is the magic of property investing.

 

I had no expectations of the tax rebate, just acted on the potential tax reduction. Again it was the catalyst for starting and no longer a primary factor.

 

Thanks Kieran, that is really helpful!

 

My last tax return, all my properties were in profit when taking into account all the various costs for the year.

Then the depreciation gets applied. Each property is putting a decent amount of money in my pocket every year, at the same time they're all giving me a tax deduction.

Here's a tip if the government doesn't want to give me a deduction. Drop the land tax. Without it they'd all be positive geared and I'd have to pay income tax on each property.