Hidden cost of negative gearing

[Scott No Mates]

I read an interesting article today about NG. Choose carefully

When you include holding costs, depreciation allowances, all outgoings/management fees, insurances etc it is important to get your strategy right.

 

[D.T.]

It's not really "hidden" is it?

 

[redwing]

"Assuming a 37 per cent marginal tax rate, a negatively-geared investor is spending $1 to get 37 cents back, in the hope that the 63 cents they?re spending out of pocket will be made up by future capital growth ? that?s the only place it can come from,? Mr Ghoreyshi said

Heyyyy....Hope is not a strategy

 

[Terry_w]

A pathetic article actually - nothing hidden mentioned.

 

[Ace in the Hole]

How can a 400k property be negative by 10k per year?

I don't mind being moderately negatively geared as tax return converts them to quite good positive returns.

 

[INVSTOR]

The article states if he wanted to sell in a few years the property would have to be worth $427,000 just to break even. In realty though it doesn't consider all buying and selling costs.

 

[A Jeremy]

If any investors want to get into the market but can't afford a property, I will be happy to take their money and return to them 37c for every dollar given.

 

[Paul@PFI]

What a stupid article. Lets state the bleeding obvious. Negative gearing means you might not make what you think. Sherlock Holmes? Ignoring cash flows yield and depreciation? Capital growth?. A waste of my 5 mins of life.

 

[HeadsOnBeds]

The article might be a bit simple for some in here but I think you'd be amazed at how few realise the real cost. I used to think neg gearing was so important but it's was such a short term view.

The thing you don't factor in when you start out is you'll probably be only negative for the first five years (hopefully not even that long), for the next twenty you won't! And now I'd much have preferred to focus on the yields earlier on. When people say the removal of negative gearing will bring prices down and improve yields I say bring it on, not sure it really would but.....

 

[Scott No Mates]

The article might be a bit simple for some in here but I think you'd be amazed at how few realise the real cost. I used to think neg gearing was so important but it's was such a short term view.
.....

Quite right hob. There are new players in the market every week, going on buying bus trips, attending seminars with spruikers, jumping on the bandwagon without any advice or knowledge. These are the ones who think ng & cg is a get rich quick scheme but can just as quickly send you deeper into debt.

 

[superAndrew]

"Negative Gearing". I don't like the sound of "negative" already.

 

[eternit]

If any investors want to get into the market but can't afford a property, I will be happy to take their money and return to them 37c for every dollar given.

lol why would anyone do that when they are not forced to pay tax to you however they do pay tax to ATO

 

[pinkboy]

What a stupid article. Lets state the bleeding obvious. Negative gearing means you might not make what you think. Sherlock Holmes? Ignoring cash flows yield and depreciation? Capital growth?. A waste of my 5 mins of life.

Surely that didnt take you 5 minutes to breeze over?

pinkboy

 

[D.T.]

Surely that didnt take you 5 minutes to breeze over?

pinkboy

All fee earners over estimate their time

 

[Paul@PFI]

And if the negative gearing doesnt come from cashflow what is the issue ??

eg : Cashflow positive but the depreciation and CA cause the $10,000 "Loss"...And a higher tax refund...This ADDS to the positive cashflow.

I rarely ever see or hear a potential investor seek a IP that will burn their cash. Even those keen to take on higher risk eg SMSF limited recourse seek property that is self sustaining. The lender would refuse the loan !

For a 10K loss on a $400K property this would mean its $24K cashflow negative before depreciation + tax refunds etc. Who would outlay $400K on a property that yields so low and requires them to kick in $2k a month ????

 

[ozmale42]

And if the negative gearing doesnt come from cashflow what is the issue ??

eg : Cashflow positive but the depreciation and CA cause the $10,000 "Loss"...And a higher tax refund...This ADDS to the positive cashflow.

I rarely ever see or hear a potential investor seek a IP that will burn their cash. Even those keen to take on higher risk eg SMSF limited recourse seek property that is self sustaining. The lender would refuse the loan !

For a 10K loss on a $400K property this would mean its $24K cashflow negative before depreciation + tax refunds etc. Who would outlay $400K on a property that yields so low and requires them to kick in $2k a month ????

Even without depreciation a $400k property in my area could easily be let for $450 pw ($23k p.a) and if you borrowed the lot at 5.3%, the interest cost is only $21k p.a, so you're ahead $2k to contribute to levies and rates.

To be $25k in the negative would require rates to hit 12%. Now that won't ever happen now will it guys?

 

[greedy2000]

And if the negative gearing doesnt come from cashflow what is the issue ??

eg : Cashflow positive but the depreciation and CA cause the $10,000 "Loss"...And a higher tax refund...This ADDS to the positive cashflow.

I rarely ever see or hear a potential investor seek a IP that will burn their cash. Even those keen to take on higher risk eg SMSF limited recourse seek property that is self sustaining. The lender would refuse the loan !

For a 10K loss on a $400K property this would mean its $24K cashflow negative before depreciation + tax refunds etc. Who would outlay $400K on a property that yields so low and requires them to kick in $2k a month ????

You might have got your maths wrong. the article suggests that for a $400K property you might inccur a $10K pa loss, of which you would get some of that back in tax and need to recover $6,700 pa in CG to break even.

$10K is not unrealistic using some broad assumptions based on avearges, assuming 100% lend.

6% Interest less 4.5% Yield + Rates + insurances + average maintenance = Roughly $10K pa.

the CG breakeven point reduces if you add in those deductions such as depriciation and home office expenses etc.

 

[Moneyman_85]

Maybe it's a buyer beware for the overinflated syd prices waiting for rents to catch up lol

 

[Paul@PFI]

You might have got your maths wrong. the article suggests that for a $400K property you might inccur a $10K pa loss, of which you would get some of that back in tax and need to recover $6,700 pa in CG to break even.

$10K is not unrealistic using some broad assumptions based on avearges, assuming 100% lend.

6% Interest less 4.5% Yield + Rates + insurances + average maintenance = Roughly $10K pa.

the CG breakeven point reduces if you add in those deductions such as depriciation and home office expenses etc.

My after tax maths were spot on. The article said $10K "out of pocket". That's after the tax refund reduces the loss. I was alluding to the difference between CASHFLOW and rental property net rents after tax. To end up with $10k out of pocket you would have to have a $20k loss before tax returns (ie cashflow). $2k a month. Assuming some is depreciation etc I did the maths on yield and it was something like 2%...Who would buy it ?? Who could afford to keep it. What lender would let you burn $2k a month on top of the loan.

 

[Paul@PFI]

Even without depreciation a $400k property in my area could easily be let for $450 pw ($23k p.a) and if you borrowed the lot at 5.3%, the interest cost is only $21k p.a, so you're ahead $2k to contribute to levies and rates.

To be $25k in the negative would require rates to hit 12%. Now that won't ever happen now will it guys?

That's what my maths said. Or about 1.5% rental yield as income and out of control costs too. (A humpy ??)