Is negative gearing out of fashion?

From: Sam Vannutini

After previously posting an opportunity on Caveat Emptor, I was surprised by respondent's comments that they are only looking for positive cash flow properties. Am I a dinosaur in still believing that good buy and hold properties are essential for wealth creation? It is extremely difficult to buy at a price in Melbourne that would make it positive. My view is that equity growth allows you to duplicate you assets.
I also believe that quality properties will become cash flow positive after about 3 years as the rent increases.
There is also the issue about taxable income. If you have a capital gain and do not sell, you are not realising this gain by using the equity to buy more assets, or using the loan to fund lifestyle. Naturally, this part of the interest cannot be claimed as a tax deduction.

Lease options and wraps all seem to the flavour of the month. Whilst I believe that they have apart to play in my strategy, I worry for those who believe that they are the holy grail. I use them to pay the holding costs on my buy and hold.
On the logic of only buying positively geared, you would have to target regional ares, or do nothing until prices come down.

Am I alone in this school of thought?

I would be most interested in your views.
Cheers, Sam.
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Reply: 1
From: Robert Forward

Hi Sam

Currently, with most of the capital cities in Australia going right off, it's no wonder why investors are being very cautious.

What gets me with something you've said about rental increases.

This is a little story about a unit I once rented in the Eastern suburbs of Sydney.

Way back in 1995 I rented a 2 1/2 bed unit with garage for $320pw. Last week, in the Domain, the unit was back on the market for a tenant. Take a guess what the asking rent was... $350pw.... Yes that is right and with the first week free too.

So after 6 years of elapsed time I could have rented this unit for $330-340pw. So that isn't much of an increase now is it. But that is just my little story.


The Sydney "Freestylers" Group Leader.
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Reply: 2
From: Mark Laszczuk

I'm just getting into property investment, so don't think I'm getting on my high horse or anything, but I would never, ever buy neg. geared property. I just don't understand the appeal in buying an 'investment' that loses money every month in the hope that it will rise in value over time. Especially since there is no guarantee. However, although pos. geared property is harder to find, it is there. Sometimes it's just a matter of negotiating with the vendor to get the price down to where you can make money from it straight away. As for lease options, well, the advantage there is that if done properly, the rights stay with you, not the tenant and you make money every month without having to be a landlord. (I am going to be using Tony Barton's method) and to me that's what is so appealing about them, I don't have to worry about repairs costing me money and other headaches associated with being a landlord.
October 24 addition.
Wow, a lot has happened in the last six or seven weeks - enough to make me really embarrassed about this post. I've changed my perspective to the point where I would consider negative gearing - to a degree (middle income earner) but the point is, it's not totally out of the picture these days, just would need to be the right deal. The moral of the story: keep your mind open and educate, educate, educate!
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Reply: 3
From: Mike .

Hi Sam,

You said: "Am I a dinosaur in still believing that good buy and hold properties are essential for wealth creation?"

I hope you've got a sense of humour, Sam because I saw some of your distant relatives in the Jurassic Park movie last night. In fact, how about we create yet another Conference and call it Jurassic Park... a place where neurotic Negative Gearers discuss capital growth prospects of their buy and holds.

Now I'll try and redeem myself by adding some value to this post. I think it is fair to say that serious property investors today are not interested in buying negative geared property, even off-the-plan. That is not to say they aren't interested in capital growth. The Michael Yardney strategy of investors joint venturing as codevelopers is taking off because investors now can have their cake and eat it, too. By buying at wholesale you can have a growth property which is cashflow positive from day one.

Now, if you don't want to wait till a boom happens to get your capital growth, why not do Wraps or long Lease Options where you add some capital growth to the current price and contract someone to pay you 3% over the prevailing rate on the growth adjusted price?

How about it, Sam? Are you going to stay a dinosaur forever? ;P

Regards, Mike

PS: My first 2 IP's are Negative Geared. My next one will be a long (10 year) Lease Option.
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Reply: 3.1
From: Kristine .


It seems to me that very few people actually understand the terms 'negative gearing', or 'positive cash flow', nor is there a clear understanding of how our tax system is set up to encourage the purchase of income producing assets.

A significant part of my job (Cert Business Studies - Advanced Cert Accounting : Cert IV in Business - Estate Agency Practice) is explaining how to invest. What to invest in, is almost a secondary consideration.

For example, using the Property Investment Analysis program, I can demonstrate how someone earning approx $85,000 per annum can buy and hold a 3 Bedroom, 17th floor penthouse with stupendous views in Melbourne CBD for approx $25 per week. Or someone earning approx $74,000 can buy a 2 Bed, 2 Bath freehold apt in the CBD and enjoy a positive cash flow of $8 per week.

To poo-poo these opportunities because they are straight forward, well documented, securely tenanted and with indexed rentals and full depreciation benefits, would be like saying that without risk there can't be a 'real' investment. showed that the median value of residential property in Melbourne 3000 (the actual CBD)rose 43% for the year ended June 30, 2001. With potential for double figure capital gains , would it still be passe to contribute $25 per week?

Sam, I have been fascinated with dinosaurs since I was a child. They are now extinct because of a meteor, but they roamed the globe for a long, long time.

Mr Kiyosaki defines wealth in terms of how long, not just how much. And I figure, if I am going to create enough wealth for me and my family to be able to live OFF THE INCOME of that wealth into future generations, then it's not too much for me to be putting in the occasional $25 per week to achieve that aim.

But that's just my humble opinion. See you at Jurassic Park!

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Reply: 2.1
From: Dave :)

Sam, hi.

You know, by definition alone, negative gearing is perceived as bad by many

Uneducated investors buying over priced and negatively geared properties,
whose sole priority is tax deductions and wishing (with crossed fingers)
that their property increases in value, should be very concerned. There are
many variables in the whole negative gearing/OPT scenario that eliminate the
control in your investment's performance.

Having said that, I must openly state that I have absolutely no problem with
negative gearing. In fact, I have met with dozens of investors who have
become very wealthy in a relatively short period of time by negative

Most people that decide, or are 'sold', on the concept of negative gearing
seem to completely throw out the window everything they know about investing
in property - simply because they are buying off the plan and accept the
marketing company's promise negative gearing will make them rich. Many sign
the dotted line ignoring fundamentals we all know such as:
- negotiating the best purchase price (do they forget the fact that they
make money when they buy? If anyone pays the asking price presented by a
developer or agent, I reckon they've slowed their wealth creation progress
by at least 12 months)
- buying the type of property that would be attractive to both owner
occupiers or tenants
- carefully selecting the suburbs they buy into, down to the right area
within a suburb
etc etc...there are stacks of principles, you all know them.

I have often said that I'd rather own one sapphire, out of twenty that exist
in a very good suburb, where there are 100 people looking to live in it,
than own one diamond, out of 300 that exist in the best suburb, where there
are 100 people looking to live in it. To me, this sapphire is far more
valuable than the diamond. And, if I bought this sapphire at the best
possible price, negative gearing the property presents no lost sleep for me.
In fact, I am confident it will do well.

Sorry for the long winded post. Fact: Uneducated negative gearing can
cause a great deal of grief and loss. Fact: An educated, well researched
and negotiated property acquisition, that is negatively geared, is still a
very powerful way to increase one's net worth. That's my opnion.

Is it out of fashion? Who knows...and who cares - I've always been told I
have no fashion sense anyway.



{Life's short...Play hard}
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Reply: 3.1.1
From: Jude H

Here we go again,

When will people realise that the only 'best way of investing' is the one that you are comfortable with.

Me wrap? Not on your life. Yet it is a proven successful method. There is nothing wrong with wrapping just because I choose not to wrap.

Off The Plan? Bought for 200k, now (sworn)valuation 260k and it's not yet completed. Perhaps a bit of due diligence went into the purchase?

Never ever sell? Why not? What if by selling that property it would enable you to proceed with something more advantageous?

Never buy units, not enough land content? What about the person who NEVER buys units that now has 2? Bought for way, way, way under FMV. Shouldn't have bought them because units is not in their game plan?

Every single method of investing has hard luck stories attached to it. That does not mean that the method is no good, perhaps if we were to look at the person applying that method the answer for failure may become more apparent. Some minor little detail left out like due diligence perhaps?

If someone's chosen method of investing is not yours, that's OK. Are they not getting wealthy as fast as you? That too is allowed. Everyone has their own comfort zone, if you can step out of yours, well done. Just remember that they too have stepped out of theirs, they just didn't take as many steps as you. The thing to remember and congratulate them on is the fact that they did step out. Many, many, many do not.

Negative gearing? Well obviously that doesn't work, just ask Jan Somers. Enough said?


~ Never take no for an answer from someone not empowered to say yes ~
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From: Jude H

Sorry Rolf, didn't mean to attention you on the above. :)


~ Never take no for an answer from someone not empowered to say yes ~
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Reply: 2.1.1
From: Markus Marbach


Just out of interest, who's Tony Barton. Apologies for my ignorance ...



"Freestyler" Apprentice
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From: Sergey Golovin

Negative gearing is not out of fashion as yet and couple of reasons to it -

* Needs few more legislations to push through the parliament to kill it completely.

* Election is not over as yet.

Actually it is great question - Negative Gearing and implications on wider society.

It's just occurred me -

May be one of the reasons they have so huge casual work force in America (about 40-50%) is to reduce numbers of potentially eligible candidates to get loan or shall we say restrict them to get that loan.

Well, sound funny I know, but you have look from other point of view - do you remember Robert Kiyosaki talks about Robin Hood stile of taxation or something similar in one of his books?

Basically story goes (for once who did no read it) -
When Robin Hood started "take" money from reach (tax them) and give'm to poor every one loved it except the rich once.

Then Government changed the law and started to tax rich once on regular basis due to popular demand.

Well, few years later rich once did turn that table around and said what if we will tax all of them, rich and poor. And they did. Government loved it.

Only trick was that reach once managed to get out of it and poor once stack with it – compulsory income taxation.

Now, back to negative gearing and US in particular.
Have look what happened then – 1986, when they abolished negative gearing all together.
When negative gearing was up and running - rent was cheaper then owner occupy on weekly basis. Slightly but it was.
We know that the "flow" of people always goes by the way of lesser resistance.
It is fair enough, we all the same – to some degree.

People were not in the hurry to buy properties. Ofcourse they did, but the trend was slightly different – rent before you buy.

With the abolition of Negative Gearing game, trend has changed - rent has became more expensive then buy and hold approach (in relative terms ofcourse).

So, what happened then? Lots of investor have got hurt and lost lots of money.
And as we all know if small investors do loose money the big once do lose them eventually as well, sort of like chain reaction. Smaller fish gets eaten by big one ...

It was and it is bad for investment. To buy rental properties became very unpopular.

So, what is the solution? How to get rich or how to sustain/increase accumulated wealth?

Solution is simple - do not give a loan. If they do not have loan or restricted to borrow, they cannot buy properties and forced to rent.
Now, question is how do you restrict them from getting that loan?

People who do not have work would not able to borrow money anyway and people who has job can be restricted if they will become casual workforce.
As we all know if you are working as casual it is very hard, almost impossible to get a loan. The reason I know it because I've been there and done that.

It is big push in US now (American news TV program year ago) to formalise casual employment and introduce flexible arrangements where all your jobs (hours and income wise) would be recorded and you will get all entitlements superannuation, holidays, finance...wise.

Did not take me long to figure it out. Only year.

May be the other reason I was able to compare it all – Simply by buying negatively geared properties by myself and the Forum ofcourse.

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Reply: 3.1.2
From: Anonymous

Hi Mike

I have heard a couple of things about Michael Yardney's method of investment. Actually very positive. Can you please tell me where I can find out more, without going direct. Some independent advice please.

Arthur A
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From: Kevin Forster

One reason why positive cashflow properties are so popular at the moment is that we seem to be heading into some uncertainty regarding interest rates and the economy. While most people accept that there is currently a boom in property in the major cities, they realise that the boom cannot last forever and no-one can say for certain whether there will be a crash or a period of zero or very little capital growth. A positive cash flow property means you're still making money even though there is no cap growth and will be paying for itself with nothing out of your pocket. Depreciation allowances are just icing on the cake.

With an election in the offing who knows what promises are going to be made? Unlikely to occur but there was some noises about lifting the maximum tax bracket from $60k. This could impact on those expecting to get 48 cents in the dollar on non cash deductions if it is reduced to 40 cents in the dollar.

Kristine - why is the persons income important on those examples? If someone was earning $30k what would the results be? I'm assuming that there are some deductions being taken into account to come up with the weekly figures. For a true cashflow model on a property, the price and gross rent are the minimum starting point to see whether the deal is good.

Sam - one way to move those properties is to hold a seminar on the Gold Coast and discuss the benefits of investing in Melbourne - (great sporting venues, arts festivals, high cap growth over the last few years, etc, etc) fly the people down free of charge, sell them the properties and fly them home. I mean why should all the money go to QLD.

I don't actually think negative gearing is out of fashion in the wider community but it is out of fashion on this forum.

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From: Robert Forward

Good point about the changes in taxation rates Kevin.

Just think what will happen to everyone's negatively geared properties if the government raise the tax free threshold to $20k, as it has been mentioned earlier last month. Now that would also have a large impact on negative gearers' cashflow. Not quite as much as dropping the tax rate at the high end but there would be an impact.


The Sydney "Freestylers" Group Leader.
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From: Rixter ®

Hi Kevin,

You make a very good point about the tax issues in relation to their effect on already negatively geared property, but in relation to the following comment you made .... "I don't actually think negative gearing is out of fashion in the wider community but it is out of fashion on this forum",... it may be the people who frequent this forum, that they could be classified as being slightly more of an astute type of investor.

May be some food for thought there when we think outside the usual square!!??

Happy Investing,
Rixter :)
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From: Kristine .


The whole purpose and benefit of 'negative gearing' is relative to a persons income. Not the investment per se, but the actual gross taxable income of the person buying it.

For example, using the Property Investment Analysis program, I can demonstrate how someone earning approx $85,000 per annum can buy and hold a 3 Bedroom, 17th floor penthouse with stupendous views in Melbourne CBD for approx $25 per week. Or someone earning approx $74,000 can buy a 2 Bed, 2 Bath freehold apt in the CBD and enjoy a positive cash flow of $8 per week.""""unquote

In the instance of the penthouse, total allowable deductions for the year are approx $63,500, total rent income $38,000, (ten year, indexed lease) therefore the deductable difference of $25,500 means that a person earning $25,500 above the 48.5% threshold of $60,001 ($85,500) will gain a refund of $12,357 from their complusory, pre-paid tax, which this specific investment has actually earnt in tax credits for them.

In simple terms, this reduces their weekly tax by $237.85 which they can claim back (221.d) directly to their weekly pay packet.

However, their loan liability (my model is 8.00% averaged int only loan, a rate which no-one is actually currently paying) is still $25 per week short, so they must pay that out of their 'pocket', their net pay.

I would strongly recommend buying a copy of 'Creating Wealth in Changing Times' as it has excellent explanations and examples of all sorts of financial models. The approx $27 cost is totally insignificant to the value of the information contained in the book.

Hope this sheds some light on the subject

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From: Mike .

Hi Arthur,

I know of a development of 35 2-storey 2&3br townhouses going up in Gosford using the investor-as-developer scenario. I haven't personally been involved in one of these projects so can't give any firsthand details, but if you give me some specific questions I'll see if I can get them answered for you by the project manager of this development.

Regards, Mike
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From: See Change


would be interested in finding out details of development / project manager.

see change
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From: Arthur A Worley

Hi Mike,

Mike, I am really more interested in investing in Melbourne as that is where I am based.

You mentioned Michael Yardney and buying wholesale. I have read several items that he has published in this forum. The idea appeals as it would compensate for the high prices that are being paid at this time.

Do you, or any forum member, have any first hand information on his developments?

The negative gearing of my investment is not what I am after. I am more into positive gearing and capital appreciation.


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From: Sam Vannutini

Thank you for all your postings.
Sadly, they were pretty much as expected. I thought the posting was an avenue for discussion and ideas. Yet people seem to take it a bit personally.

Am I a dinosaur? I doubt it. I am simply a 37 year old investorsuarus who is retired and living off a great passive income.

Thank you Dave for your balanced unemotional response. I tend to agree with you that carefully selected property will always go the distance.
Perhaps I should clarify my views a bit further. By negative gearing, I do not mean buying any old(new) property for tax reasons.
I prefer to buy quality in quality areas. History has proved me correct so far.
Now, for all of you who got excited and emotional about my posting, I congratulate you all for taking positive steps towards creating wealth.
I think that it is fantastic that there are so many new concepts out there, and if you are presented with one of these, grab it by all means.
My only word of advice is that you approach eveything with an open mind, and do not just accept a certain view just because some presenter says that it is the only way to go.

I trust that whichever way you go, you make an informed decision.

Yes, each to themselves.

That said, I'm off to grab a brontosaurus burger for dinner. Yabba Dabba Doo!
Cheers, Sam.
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From: Sam Vannutini

Oh yeah. I loved the one one about buy hold and hope. I believe that came from Tony Barton's presentaion on the three methods of investing.
I have bought held and prospered.
Let's not forget economic cycles, and supply and demand while we're at it.

Dave, lets catch up for a beer and a laugh.
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