Warning Negative Gearing is a Dead Duck

Discussion in 'Investment Strategy' started by MTR, 5th Jul, 2018.

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  1. MTR

    MTR Well-Known Member

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    With current financial squeeze and perhaps 2 interest rate hikes? and markets softening, I would say the negative gear strategy is high risk in current environment.

    There is only one reason I would buy negative gearing property today and it would have to be a product where I could add value, but these may be scarce as hens teeth?? only cos the markets are softening, and therefore today's values could be off the mark on completion of project

    Negative is like treading water

    Negative Gearing Can Be Like Treading Water
     
  2. Beano

    Beano Well-Known Member

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    Or where the rental was below market
     
  3. John_BridgeToBricks

    John_BridgeToBricks Buyer's Agent Business Member

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    Is negative gearing an investment strategy?
     
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  4. John_BridgeToBricks

    John_BridgeToBricks Buyer's Agent Business Member

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    Or a tax outcome?
     
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  5. kierank

    kierank Well-Known Member

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    Totally disagree.

    Every property I ever bought was negatively geared. That is, the ownership expenses exceed the property income.

    Anyone who buys a PPOR is in this situation, lots of expenses but no income. Even worse for these folks is that there is no income tax relief.

    Negative gearing is alive and well. It is not a Dead Duck. IMHO, it will be around for ever.
     
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  6. euro73

    euro73 Well-Known Member Business Member

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    So its not negative gearing. Its home ownership
     
  7. Sackie

    Sackie Well-Known Member

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    IMHO being in a NG situation is not as bad as some make it out to be. Depends on a whole host of factors.

    1. How much NG'ed is the asset per year?
    2. What is the overall goal for the asset? Long term BnH? Reno? Develop?
    3. Is the market you are buying into likely to have strong CG over the next 7-10 years?
    4. What is the unique financial situation of the investor ?

    People often think NG situations mean you are losing money. Well true. In one sense you are losing money but what is the broader picture for the asset? I view it almost the same as a business. Most businesses are lucky to break even for the first few years.

    The most important thing in my mind with buying into a NG situation is will the medium to long term time frame return a much greater overall return than the loss of cash flow.

    This requires some speculation, but frankly I believe ALL investing no matter what it is, is speculation. A better way to approach a NG situation is to be able to add value in some way so you are less reliant on a positive speculation result with organic growth, and are able to manufacture returns where the NCF is taken into account as an expense of the overall deal.

    My 2 cents.
     
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  8. John_BridgeToBricks

    John_BridgeToBricks Buyer's Agent Business Member

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    Spot on.
     
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  9. Perthguy

    Perthguy Well-Known Member

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    @Leo2413 holding a development site while you get council approval for three townhouses. In my experience the process can take 12 months from start to end. Just for the coucil approval and building license. You have an old house on the site but it doesn't bring in much rent, so your site is negatively geared until you build. Build to hold and that negatively geared site becomes a nice little earner ;)
     
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  10. 2FAST4U

    2FAST4U Well-Known Member

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    Negative gearing will become dead once Labor gets elected. It was already on the cards at the last election. Existing investors won't be impacted. Negative gearing is still a great strategy depending on your goals and income level.
     
  11. kierank

    kierank Well-Known Member

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    Not in my eyes.

    DEFINITION of 'Negative Gearing' Borrowing money to buy an investment asset without receiving enough income from the investment to cover the interest expenses and other costs inolved in maintaining it.

    When I buy a PPOR, I view it as an investment. I buy it to make money. At the moment, that money is tax free. I don’t buy them to lose money, that is for sure.

    To me, home ownership is when I own the home. That is, I have paid back the loan I used to buy it.

    I know it is a weird way to look at things but it works for me.

    I don’t. I see it as losing income.

    ... and there are many ways of replacing lost income; owning one or more businesses is my preferred way.

    For once we agree ;).
     
  12. Sackie

    Sackie Well-Known Member

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    Yeah..for once...:rolleyes::D
     
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  13. Beano

    Beano Well-Known Member

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    Never brought a NG property (at the time of purchase)
    Even personal residence the cost of ownership (expenses incl interest calculated on 100pc borrowings ) was slightly less than renting
    (closest was a low yield but a overdue rental review ...which was back dated prior to purchase made it positive!)
    .....but when interest rates rose to 20% then YES all my properties became NG....
     
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  14. Perthguy

    Perthguy Well-Known Member

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    Not if they stick with their current policy.
    - currently negative gearing? Business as usual
    - buying a new house? Yep, you can negatively gear too
    - have other investment income? Sure, you can negatively gear too.
    - lower income earner trying to buy an older property? Sorry buddy, no negative gearing for you.

    It's pretty targeted at mum and dad investors and lower income earners.
     
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  15. marmot

    marmot Well-Known Member

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    If the banks keeps on tightening home loan lending ,and it looks highly likely more restrictions will be added , then negative gearing will become a big anchor around the necks for those that came to the party late.
    Many of those are probably still sitting on big debts for their PPOR, which seems to be standard practice these days.
    In more news CBA is going to discontinue its low doc mortgage products products and many banks will further scrutinize serviceability for borrowers trying to borrow more than 4x their income.
     
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  16. Westminster

    Westminster Tigress at Tiger Developments Business Member

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    Negative gearing is a tax minisation strategy - it isn’t an investment strategy (my opinion).

    Everyone with an IP can use negative gearing - even someone with a cash flow positive IP. It is the claiming of all costs and depreciation against income. No one said you had to have an income shortfall to be using it to minimise tax.
     
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  17. chylld

    chylld Well-Known Member

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    I wouldn't even go that far... I'd say it's a consequence that may have tax minimisation implications.

    --

    If I may go off on a tangent: say you have an IP that is positively geared, i.e. cashflow positive after all rent/repayments/deductions/depreciation/etc. You then borrow against new equity in that IP to fund other investments, but the rent hasn't increased, so cashflow becomes negative.

    Would you consider this IP negatively geared now? Or would you still consider it positively geared after taking into account the extra income from the other investments?
     
  18. hobartchic

    hobartchic Well-Known Member

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    That property would be mortgaged. And still cash flow positive. That's not negatively gearing.
     
  19. chylld

    chylld Well-Known Member

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    Even though the total repayments for loans secured by the IP are greater than the income generated by it? i.e. cashflow negative?

    (some of those loans have a different purpose, but are still secured by the IP)
     
  20. hobartchic

    hobartchic Well-Known Member

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    Yes, it's mortgaged e.g. there is a loan. Just because the loan is for something else does not change that. It's mortgaged and probably a secured loan but it't a loan. It's not negatively geared.
     

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