I need a mentor-How can you own lots of houses but neg gear all of them

[chara79]

I dont understand, i am told you need to negative gear investments properties and i agree.

I understand you need a lot of them to see the real money

what i dont understand is if you negative gear all your properties you would need a very good job to be able to pay the difference (when it comes to paying the loans).

If i buy a house and in say 5 years i can pull $40k and purchase another house, great but how do i now pay the morgage for both if the rent does not cover them. Even if i can do it for 2 house i could not afford the 3rd...

I have read books, asked everyone i know, but no one can explain it to me. I dont want to go to a seminar and try to find $1000 and find i have waisted my money.

I live in Hastings Victoria and i really would love someone to help me reach my goal of property development. I really need some advice as what i can do to improve my knowledge, and how and where to start.

 

[agent007]

This is a good book for you to start reading:
http://www.propertyupdate.com.au/pages/book

Have a read of the LOE articles in this site:
http://www.invested.com.au/articles/#money-management

 

[Rob Williams]

Have you read Michael Yardneys book (referred to in the above post) or Ed Chan's Wealth for Life? Both highly recommended.
One of my favourite mindset books is Secrets of the Millionaire Mind by T Harv Eker. Property investment, like any other investment is, in my opinion, 80% mindset.
There are plenty of people here on the forum to help you, too.
Just remember, nobody else can do your push-ups for you.

 

[investor888]

i am told you need to negative gear investments properties and i agree.

Who says you "need" to negatively gear investment properties. Negatively gearing is only good if the market is rising. If the market is falling, or flat, than negative gearing is a very poor investment strategy because you are effectively loosing money.
So you pay less tax (wow!, that because you earn less money).
Say in a flat property market you are negative $20K/yr, and your on a 40% tax rate, so you get 8K back. That still means you are loosing 12K out of your own pocket. Unless you property has appreciated by that much, you have lost money.

Here's a good website explaining, with examples, where negative gearing has it's shortfalls, including the limit to the number of properties you can hold.

http://www.propertyinvesting.com/strategies/negativegearing.html

Personally, I think its best to have a mix of both positive and negatively geared property. This way you balance out the risk a bit (what if you loose you job, and can't cover the negative gearing on all your properties?.)

Your ultimate goal is to have everything positively gearing, and not have to work at all, and just live off the income from the properties, isn't it?

 

[kathryn d]

I also don't think you need to negative gear properties.(In Canada it is only permitted for a very short time)
A property should be able to pay for itself.All of ours do.We never worry about Capital Gains. We will take a sure thing of Cash Flow over the hopes it will raise in value.
If you have enough properties plodding along making money, you never worry about servicability.

Our first investment when we return to Aus will most likely be a house that we will rent out rooms to travellers.Then we will be looking for more money makers or may consider building them.

 

[chara79]

thanks

Thankyou all for your thoughts/ideas/opinions, I looked up the links and read right through them, possative gearing is not as scary as i thought.

I know i have a lot to learn, and it will take a while to get what i want.

Thank you for spending some of your time helping others it really does make a difference to people who need that helping hand. Your advice is great.

 

[troyhunt]

Don't confuse negative gearing with negative cash flow; you can be negatively geared with an on-paper loss due to depreciation benefits but still have positive cash flow. I'm seeing a lot of properties that meet this definition with the way rents and rates have gone.

 

[troyhunt]

Negatively gearing is only good if the market is rising. If the market is falling, or flat, than negative gearing is a very poor investment strategy because you are effectively loosing money.

Negative gearing is a strategy that requires a long term approach. If you’re looking at periods of 10, 20, 30 years, you’re bound to have periods of flat or negative growth. The important thing is the net result over time.

Say in a flat property market you are negative $20K/yr, and your on a 40% tax rate, so you get 8K back. That still means you are loosing 12K out of your own pocket. Unless you property has appreciated by that much, you have lost money.

From purely personal experience, property costing a total of $12k net during the recent period of higher rates would be worth about $1M. Assuming even mediocre capital growth of say 5%, the feasibility is clear. This works when your total net annual cost is small (I’ve always kept it within about 1.5% of the property value) but obviously its not going to work if your holding costs are very high proportional to the value or you’re not achieving reasonable capital growth.

Personally, I think its best to have a mix of both positive and negatively geared property. This way you balance out the risk a bit (what if you loose you job, and can't cover the negative gearing on all your properties?.)

Totally agree with this one and it’s now easy to do in the current environment.

 

[troyhunt]

A property should be able to pay for itself.All of ours do.We never worry about Capital Gains. We will take a sure thing of Cash Flow over the hopes it will raise in value.

This is simply an alternative strategy to negative gearing. The approach many will use is to negatively gear then leverage accrued equity to acquire further investments. In this case, capital gains are extremely important as they determine the rate of acquisition.

chara79, whether this approach is suitable for you will depend on your age, serviceability and risk aversion. If you’re young with good, stable income and are happy to take on a higher risk profile then consider this direction. If you’re approaching retirement, have limited income or are risk averse, you might take the more conservative approach. It would help if you can share more information about your situation (PM me if you like).

 

[Rob Williams]

Agree with some of the other posts. As with any investment strategy, there is no good or bad or right or wrong. What works for one individual at a particular stage in their life may be a totally inappropriate strategy for someone else.
Have a look at Helen Collier-Kogtevs "47 Biggest mistakes ..." book. It might help give you a balanced view on the topic. It certainly gave me a few ideas.

 

[chara79]

thanks rob, your advise is helpful, i am really keen to do this and i am reading all i can to get to my goal.

 

[jaycee]

positive gearing: costs you nothing as rent takes care of all expenses (including depreciation) - if rent exceeds expenses, you will pay tax on that extra bit of rent..

negative gearing: rent doesn't cover all expenses, so you would chip in $ out of your pocket to pay for some - you claim them against your taxable income (which includes your rent) and you get ome of your tax $ back..

either way, the aim is to secure a property for yourself. if you found one that fit your criteria and was paying a fantastically high rent, don't walk away from it !

 

[josko]

I dont understand, i am told you need to negative gear investments properties and i agree.

I understand you need a lot of them to see the real money

what i dont understand is if you negative gear all your properties you would need a very good job to be able to pay the difference (when it comes to paying the loans).

If i buy a house and in say 5 years i can pull $40k and purchase another house, great but how do i now pay the morgage for both if the rent does not cover them. Even if i can do it for 2 house i could not afford the 3rd...

I have read books, asked everyone i know, but no one can explain it to me. I dont want to go to a seminar and try to find $1000 and find i have waisted my money. It is called living off the equity of your property and can be very dangerous as I have learnt.

I live in Hastings Victoria and i really would love someone to help me reach my goal of property development. I really need some advice as what i can do to improve my knowledge, and how and where to start.

Hi chara,

This is my experience:

Be very careful. What most property advisors promote is the "Do what the rich do and live off your equity" approach. This means living off the capital gain in your properties when you refinance.

To continually be buying negatively geared properties does mean you need a decent income.

Depreciation and Tax Returns can be of little benefit when you are HIGHLY negatively geared.

There may be times in your portfolio, where there will be no growth and even negative growth. One of those times is now. I have learnt the hard way, that being highly geared with a negatively geared portfolio can be terribly hard to maintain.

I have been forced to sell a few properties- losing tens of thousands of dollars, to top up reduced values on properties and lower my exposure to debt.

While both my husband and I were earning enough to cover shortfalls in NG, some things in life...like having another baby, an unexpected recession and a credit crisis can change your circumstances quicker than you think.

I think I can safely say that not one investor here would have walked the same path to get where they are. All I can tell you is my experience.

Having said that, I have lowered my risk - a good thing - and am having the most wonderful experience of creative thinking while learning even more about managing my portfolio.

I read books, I attend Seminars, and took advice from Mentors.

You'll find your own way and your own path. Don't let anything deter you, but make informed decisions and learn from your mistakes as I have. There is no better lesson.

All the best,


Regards JO

 

[josko]

PS: You'll get all the advice you need on this forum. There are some fantastic investors here with loads of experience.

Never be afraid to ask questions.

Regards JO

 

[BillC]

Property have all types of investors and we all have differant ways to invest
The first thing you should do is work out the sums and look at how much you can afford
Have you got your own place
If you havnt you will need a deposite for your first ip
What are you looking for Capital Growth or Cash Flow
This is the way it works
Capital Growth investment properties are usualy closer to major cities and cost more as the land value is more expensive and therefore negetively geared
Positive geared properties are found further away from major cities and land value cheaper and more affordable
I dont want to confuse you but before you do anything please read books,look at this forum and do your research
I suggest all of Jan Somers books
Good Luck

 

[want2bewealthy]

I never quite understood either how some investors can keep buying when all or part of their portfolio is neg geared.

I now find that over time, financing property just gets easier and if worst comes to worst an investor could simply pull some equity to fund the shortfall across their prtfolio and claim it as a deduction, problem solved.

Ive never had to utilise this method so far, properties have been slowly becoming CF neutral so basically zero holding costs for me, then you simply buy more. its one of those things you just to have to do and find out for yourself

 

[josko]

I never quite understood either how some investors can keep buying when all or part of their portfolio is neg geared.

I now find that over time, financing property just gets easier and if worst comes to worst an investor could simply pull some equity to fund the shortfall across their prtfolio and claim it as a deduction, problem solved.

Ive never had to utilise this method so far, properties have been slowly becoming CF neutral so basically zero holding costs for me, then you simply buy more. its one of those things you just to have to do and find out for yourself

Hi want2bewealthy,

If worst comes to worst: your equity drops due to the fall in values and you cannot refinance.

I was of the same thinking as you. I have recently found that this simply does not work - if highly geared. If you are lucky enough to have LVR's of 50%, then a 10-20% drop in value may leave you 10 or 20% of equity to refinance on. Fantastic. However, many of us here have not been able to accumulate enough equity to justify refinanceing in the current storm.

Regards Jo

 

[want2bewealthy]

Hi want2bewealthy,

If worst comes to worst: your equity drops due to the fall in values and you cannot refinance.

I was of the same thinking as you. I have recently found that this simply does not work - if highly geared. If you are lucky enough to have LVR's of 50%, then a 10-20% drop in value may leave you 10 or 20% of equity to refinance on. Fantastic. However, many of us here have not been able to accumulate enough equity to justify refinanceing in the current storm.

Regards Jo

I guess youre right but time in the market will prevail, I know that the majority of markets within Australia are on the way down but some are in an upturn such as mine at present, There will come a time when I hit the same roadblock and just hope it doesnt happen at a time when Im ready to retire, might keep me at work for a few more years.

 

[josko]

I guess youre right but time in the market will prevail, I know that the majority of markets within Australia are on the way down but some are in an upturn such as mine at present, There will come a time when I hit the same roadblock and just hope it doesnt happen at a time when Im ready to retire, might keep me at work for a few more years.

Good on you w2bw,

I hope you don't hit that roadblock! This forum is so good for learning from the mistakes of others...I wish I knew it existed when I first started out!

Regards JO