NSW under what situations negative gearing is ok?

I'm trying to understand under what situations negative gearing is ok for the investors?

 

Under any situation it helps you move forward towards your goals and is inline with your own financial situation and investment strategies. It is not necessarily the 'evil plague to avoid' as many would have you believe.

 

What @Leo2413 said & in a norwesterly on the second Thursday of a month with a blue moon.

It's totally dependent upon your own financial situation. You still have to be able to afford to live after paying all property related expenses, so you can't more than your income and any savings you are prepared to spend If there is no sign of going CF+ or reasonable expectation of a CG.

Short term pain not financial drain.

 

Why is this thread put in the NSW category?

Surely. Neg gearing is valid outside NSW

 

negative gearing is not a strategy, nor an instrument to build your wealth/portfolio. it is probably some of the things to consider when you do you cash flow analysis.

 

Would you start a business than say

" Im loosing money " Its ok I have a negative geared strategy?

No

Most business require start up capital and a hell of a lot of effort.

Start up capital is the money you invest and may never recover but is required for the business to start up. You will write this of as a loss or capitalise .

The hope is once the business is established you will make money.

This is the same relation with Property.

You invest start up capital which is deposit legals and so on and a allow x amount of years for property to run at a cash flow loss . You are doing this in hope that the property will start making money and you will recoup the lost starting capital.

Property and business are very similar

Negative gearing has become some Voodoo magic for stupid people to blame why they can afford property.

 

That's what happens when you get a couple of spruikers (& experts) on a stage and a room full of gullible punters.

 

For me neg gearing is cream on top or a bonus.

Have a failing business, neg gearing or tax deductions make a painful blow less painful.
Have A thriving busienss and tax deductions just make the day a lot brighter

Same with real estate

 

My understanding is that it's a tool, not a strategy.

 

see my post

" negative gearing is not a strategy, nor an instrument to build your wealth/portfolio. it is probably some of the things to consider when you do you cash flow analysis."

 

@Eric Wu I totally agree with you.! i simply quoted your post to highlight your point .

hahaha

 

For me it was buying in Sydney 5 years ago.

 

The market has a bigger effect on whether negative gearing is suitable more than personal circumstances.

If prices aren't moving upwards NG isn't beneficial for high or low income investors.

If prices are rising such as Jane says, Sydney 5 years ago, then its very OK (but still must be able to meet the shortfall)

 

If you bought a negatively geared property at the top of a boom cycle you are in the most risky and vulnerable situation

Negative Cashflow + Negative Equity = worst place to be in real estate

Your only hope is hope

 

Yes, where you have good CG it negates the fact that you are losing money every year. But often people buy NG properties and don't see CG therefore are getting further and further behind each year.

 

Having run a couple of different business and owning property I would say they are not really similar at all.

Ken Oath, I would go into business with the aim of losing money if I knew I was going to make double or triple on my capital without doing much in a decade. The thing is, it is quite the opposite in business. In a business you need to invest and be turning a profit fairly quickly to survive. There is no long term pay off otherwise.

 

I also think negative gearing can be ok in certain circumstances if it's not long term and the cashflow can be turned around in the foreseeable future.

For example (in certain markets), older properties on large blocks of land are nearly always negatively geared when you buy them, but once you add the extra dwelling(s), the cashflow can change dramatically.

 

I would have forfeited many millions of dollars if I interpreted that advice at face value. My interpretation of 'never lose money' is somewhat explained below. I see it as 'paper loses' (even though its real cash flow) with risk taken into account for a longer term strategy which makes the deal an overall winner, on the balance of probabilities.


What Does Warren Buffett REALLY Mean By “Never Lose Money”?

G A Chester | Thursday, 17th December, 2015

One of the most widely quoted pearls of wisdom of legendary investor Warren Buffett is: “Rule No. 1: Never lose money. Rule No. 2: Don’t forget rule No. 1”.

At first sight, this seems to contradict another of the great man’s gems: “Unless you can watch your stock holdings decline by 50% without becoming panic-stricken, you should not be in the stock market”.

However, the contradiction can be reconciled if we recognise that there’s a difference between seeing a decline in the value of your portfolio and losing money. Doubtless, if you sell out in a panic when stock markets have plunged by 50%, you’ll lose money — certainly on your recent purchases. But if you hold through the downs of the market — ideally buying more shares when prices are low — you should make money in the long run.

So, when Buffett talks of never losing money, he’s not referring to temporary “paper” declines in stock values. He must be referring to crystallised cash losses. However, that begs a pointed question: how can Buffett tell us to “never lose money” with a straight face when he himself has crystallised some notable cash losses — on Tesco, for example?

Should we write off Buffett’s Rule 1/Rule 2 dictum as a snappy — but empty — one-liner; or is there something of value behind it from which we can profit as investors?

I think the answer can be found in Buffett’s approach to investing. Many investors looking for opportunities begin by focusing on the potential upside: “This share could return to its former glory of Xp”, “This share could keep rising to Yp”, “I could double my money with this share by next year”, and so on.

Buffett, who views an investment as a purchase of a slice of a business and its future cash flows, begins by asking what could go wrong. Is there a risk the business could fail catastrophically with a permanent loss of his capital? He simply isn’t interested in the potential upside if he sees a major reason why the company might fail.

How many of us, when weighing up a potential investment, make the “Principal risks and uncertainties” section of the company’s annual report our first port of call? Or the balance sheet and cash flow statement? Buffett’s approach to investing suggests we would be well-advised to do so … before being seduced by alluring earnings growth, dividend yields, potential massive market opportunity and so forth.

If Buffett is right, most of us can improve our long-term returns by simply ruling out companies where there is a risk of the business failing catastrophically with a permanent loss of our capital. I would suggest that just by avoiding companies with high levels of debt and companies that have never generated positive cash flows we can significantly reduce the number of our investments that end up being 100% write-offs.

Of course, we’ll miss out on some big winners, but Buffett’s approach is all about having that mindset of “never lose money”. If we can eliminate total wipeouts, and the permanent destruction of all the future compounding value of that lost capital, then the odds of healthy long-term returns from the stock market are in our favour. Put another way, avoid the casino mindset of “punt”, “play money” and “risky bet”, and invest in well-capitalised, high-margin, cash-generative businesses — and we won’t go too far wrong.

 

great point @Leo2413, often I heard ppl say " never lose money to make money" and quoting WB. I always thought it was out of WB's context of quoting that line.