Is negative-gearing really worth it?

[topcropper]

Thanks handyandy.

What rental yield would you need right now for positive geared property?
I suppose it depends on one's tax situation?

See ya's.



I was paying 22% interest at one point in the 80's....!!!!
I was regarded as high risk. Spose I was high risk having to pay 22%.

 

[buzzlightyear]

Thanks handyandy.

What rental yield would you need right now for positive geared property?
I suppose it depends on one's tax situation?

See ya's.

And the size of your deposit. Given the prevalence of lower deposit loans over the past 10 years, it would be natural that negative gearing becomes more prevalent.

 

[feihong]

An interesting topic. I had a long chat with one of my mates last night about the concept of "negative gearing", and I think it doesn't just apply to properties. As a lot of you may be aware of, you can leverage up to 99% for indices, and 95% for blue chips in CFD. Now, volatility aside, the same concept of "let the time compound your return" is equally effective with CFD or margin lending. Besides, there's also an added advantage with CFD that you don't need a valuer and LMI! (Of course, if you bought at the top of market, it's vulnerable to margin call).

 

[steveadl]

I disagree. If you're positive geared it doesn't matter what price growth is doing as its not costing you a cent and you are actually making money.

In the meantime you know that property prices will eventually rise as they always do long term.

It depends on the individual investor and their goals and budget. I can afford to negative gear a few properties, and given the choice of negative gearing or cashflow positive - I choose NG.

If buying CFP comes at the expense of smaller capital growth, I'd pick CG every time. We've had this discussion many times, so I don't expect to get anywhere as each to there own. But unless you're as sure that as CFP property will give you as much cap growth as a NG property - it will slow your overall asset accumulation (unless you can afford to keep kicking in big deposits for each new IP).

The above was'nt directed at you specifically Evan, just general In your example above though, the cashflow won't mean much to me - even if it's $100pw in my pocket, I'd still pick a NG property that I believe will experience CG much sooner.

If I chose the CF road instead of CG, after a few years of investing now - I'd more likely have 2 properties in a regional town as opposed to 4 in a capital city. Yes it may have given me $x in my pocket with CFP compared to $x-10 out of pocket, but cap. growth is what makes me wealthier quicker. My fiance would probably still be waiting to buy her first IP, instead of having already experienced growth that has been 7 times her NG loss since Oct. last year.

 

[troyhunt]

And the size of your deposit. Given the prevalence of lower deposit loans over the past 10 years, it would be natural that negative gearing becomes more prevalent.

But keep in mind the deposit (assumably) comes from an interest bearing account. If you're putting down a $100k deposit that might be $8k a year gross you're sacrificing. Granted, that might be less than the interest you save but it's a factor that should not be neglected in your calculations.

 

[spark]

I think it's not rational for investors to be able to buy growth assets that are positively geared. Growth assets should be negatively geared in an efficient market I would think. The few times growth assets are also positively geared are a bit of an anomaly I believe.

If you look at it with a business approach you should ask yourself is it a viable business when your revenue is lower than the outgoings... So, negative gearing as business by itself has no viability. If it is a temporary period while renovating/rebuilding, then it's just part of your costs which are lower than your return, and it's temporary. But, if it's long term and/or to save tax, then c'mon, there are so many legal ways to do it with your own business without negatively geared IPs!

If you look at it as an investment that is - a place to allocate/diversify your hard earned cash, then it's a good protection from inflation (think how much of the capital gain is actually "inflation refund" and not real growth), but then again, you need to think how much you are ready to lose on revenue from other types of investment.

I liked the CFD allegory - it's the poor man's dream - you control 1/2 Mil with your 5k bucks, and hopefully lucky enough not to get burned when market goes more than 1% against you... Of course if you got it right your returns are tremendous and you feel like those high flier bankers... Similar story with leveraging here - those who buy at the right market spot and there is a good movement up in the market after they buy, their deposit "earns" 10s, even 100s %. But if there is no movement, or a negative movement then it's similar to CFDs... I'm not saying it doesnt work - it works magnificently when you were lucky enough to outguess the market.

Plenty of resi property could be positively geared in the late 90's. I think this was an anomally. It was caused by the high interest rates 10 years earlier. It took 10 years for the horror of that time to be forgotten by investors.

You see - again it is luck/timing the market if you go on the long term CG path.

I truly believe that both the business approach and the investment approach will work and have worked - real estate is great investment, especially for conservative bears. But - not everyday.

 

[troyhunt]

I disagree. If you're positive geared it doesn't matter what price growth is doing as its not costing you a cent and you are actually making money.

In the meantime you know that property prices will eventually rise as they always do long term.

At least with pos. gearing you have the choice to hold or sell, it doesn't matter as you wont be forced to sell. You could be at some be at some stage if you are neg gearing. And possibly have to sell into a flat or falling market with little liquidity and have to take a loss as has been seen a few times on the forum lately.

If those guys were pos geared or even neutral they wouldnt have had to sell and take a big financial hit.

It's very difficult to rationally discuss this in absolutes. Is being positively geared by $100 a year a good thing and negatively geared by -$100 a year a bad thing when you're maybe talkikng about a $300k property? Is it still a good a good thing if it was positive by $100 a year ago and now interest rates are 1% higher? It's about risk management and comfortable levels of both debt and cash flow obligations.

 

[Sunfish]

At times, people have made commentary about positively geared property in the 90's, but I still believe it was still the exception rather than the rule, even then.

Depends how Sydney-centric you were, I suppose. The whole of Qld would have been close, smaller towns, definitely.

 

[SirR3D]

Well it depends on your situation, I have just bought an IP and after seeing our accountant we have worked out that the tax we get back at the end of the year covers our shortfall in repayments etc, so in essence we have our PPOR and an IP but only paying for the PPOR worked out great I thnk.

We will have to pay $7500 into the IP per year and we will get back about $8K, and that is not including all of the deuctions.

 

[jaycee]

Hi jaycee

Can I ask, do you mean that after you had sufficient equity in the revalued IP, that you transferred the second loan against your PPOR (as collateral for purchase of the IP - I'm guessing 20% to avoid LMI) to be secured against your IP, thus not tying down your PPOR?

Just curious as I've got two loans for my IP; one secured against PPOR (20% of IP cost). I'm guessing after a year or so it might be better to change the security of this to the revalued IP itself to free up my PPOR (or next PPOR) to use for other IP purchases. Although, does it really matter if I can just borrow the "new" equity from my revalued IP to purchase other IPs anyway?

Might just get a bit messy after a while though!!

Not too complicated.. This is what happened to me..

Bought my 1/2 dad's place off my brother for 50% of the total property price -obviously no LMI required.... in late 99

In 2004, I borrowed enough to buy & pay for purchasing costs of an IP. I signed paperwork that my first place was collateral against the IP / IP mortgage.

In 2008, I filled out a peice of paper which removed the collateral. That's al I had to do - whetehr the banks had to revalue the IP , I don;t know, they didnt; tell me they were going out to do it.

I did nothing more than that - did not move any loans money around at all.

 

[evand]

Yes, correct. I don't buy if i cant positive/neutral gear. i did some small developing in the western suburbs of Sydney in the mid/late 90s that turned out +ve geared and i bought in SE QLD in the early 2000s that was positive geared.

I also bought in a couple NSW regional towns that were +ve geared. I have also bought some land with obviously no yield and sold at a profit in a few years. I paid cash and it had no yield or loan so i dont know what you call that.

I havn't bought property for about 5-6 years and i wont until the planets are aligned for me again. But thats just me.

In the meantime i keep my eye on the market(s) and concentrate on the sharemarket, business or just cash.

I think negative geared property is the anomaly and a relative recent phenomenon. I only have anecdotal reasosn for thinking this as i have heard relatives talk of buying IPs in the 70s, 80s and 90s and they all remember it being positive.

eg: Houses in western Sydney in the 80s were about 60k to 80k and apparently pretty easily rented for $100 - $120 per week.

I suppose my business background stops me from putting money into a hole in the hope of some future benefit. I just cant see the sense in it.

I'm also not willing to sacrifice my lifestyle (if it came to that) by scrimping and saving to negative gear. To me, that would be a crazy way to live.

Benefit now, spend now is my motto.

If there is no immediate benefit i just wont put my money in. To do so is not investing to me, but i'm probabaly wrong there as its only my definition.

It would be interesting if negative gearing tax benefits were abolished not to mention the 50% CG discount.

Would people still be willing to put money in ahole in the hope of some future gain? I don't think so.

Anyway, its an interesting topic and i suppose depends on ones beliefs and investing style.

So evand, let me get this right, your going to wait till you can buy property that is positively geared? So at current interest rates, we would need say 13% rental yields? Is this correct?
edit. hmm. Maybe less than 13% with tax benefits.

When did you last buy positively geared property and where was it?

I think it's not rational for investors to be able to buy growth assets that are positively geared. Growth assets should be negatively geared in an efficient market I would think. The few times growth assets are also positively geared are a bit of an anomaly I believe.



Even farms? Farms only have a low return historically. History would show farmers returns at only say 5% of assets. So farms are negatively geared. The only thing that makes farms an investment is the capital gain of the land. Farmers and everyone knows that agricultural land will always go up [in the long term], so they buy land priced so that it has a low return. A 5% income return, with a 7 to 10% capital gain on the land, and a farm is a nice investment. If farms were not a growth asset, the land would be cheaper. If agricultural land had zero capital gain, then the market would adjust the land prices, and the income return might be 13% or higher.



Plenty of resi property could be positively geared in the late 90's. I think this was an anomally. It was caused by the high interest rates 10 years earlier. It took 10 years for the horror of that time to be forgotten by investors.

I just think positively geared quality property shouldn't really happen. Maybe it will again with a massive recession?


I'm not saying your strategy is wrong mate. Just looking for a discussion. You might be right.

See ya's.

 

[troyhunt]

We will have to pay $7500 into the IP per year and we will get back about $8K, and that is not including all of the deuctions.

Have you considered lodging an income variation so this is recouped in each pay packet rather than in one block at a much later date?

 

[troyhunt]

eg: Houses in western Sydney in the 80s were about 60k to 80k and apparently pretty easily rented for $100 - $120 per week.

Of course the other problem is that while interest rates are where they are at present even the yields mentioned above will still leave you negatively geared.

 

[BayView]

I'm a cashflow investor first, cap gain second.

But I want to buy in areas that also show good long term cap gain signs.

I want the property to be paying me, or virtually neutral cashflow, from day one. I don't ever want to be a slave to my properties and sit on a weekly cashflow drain forever and a day, and have to slog away at work to hold an investment.

It can be done if the property is positive cashflow after tax, which would require decent yields, plus good depreciation, a decent deposit (but not always necessary) and reasonable interest rates.

With recent low yields around the traps, this would have been very hard to do, unless you were able to buy below market, add value immediately and be able to put the rent up as well.

The trick, I believe, is to maximise EVERY aspect of the property selection, to maximise your cashflow;

1. high rental demand area
2. high depreciation/tax benefits - look at a 221D form (tax variation form)
3. ability to add value
4. excellent location
5. good cap gain factors in area such as employment, desirable location (as above)
6. interest only loans - preferably locked rates. (we have LOC's for flexibility).

The good news is that rents are on the rise, while property prices are starting to flatten, so the rent returns will be much better over the next year or two. if the rates drop down a bit, then a p.c.f.p.a.t property will be much easier to find.

 

[jaycee]

Interesting points Evan & LaAussie, enjoyed reading them.Th econfusing hting for many new ones is the fine line between do it right & do it now! as both are virtuous.... Had I waited, I wouldn't have saved a deposit to get into an Ip, bloody hopeless... However, evan reminded me htat back in the day, I wooul dhave had to basically, ti was the bloody norm.. now, we belevie in strategies... Like I said though, my palace appereciated $150k in 4 years, hopefully $200k in 6, about hwne I reckon it will be cf neutral... ( 2 more years)... Now that I analyse that, I reckon that's too long, I should have tried & found a better yielding property.... but is it better that I jumped in rather than hesitated and not bought at all ? I beleive my thinking is a little clearer now, and my search for another property would focus on comparing yield etc better

 

[Bricks & Mortar]

Anyway, its an interesting topic and i suppose depends on ones beliefs and investing style.

EXACTLY!

We started of with land in VIC... NO NG there!
Yet netted 170% on two properties

Bought more in QLD and sold the VIC properties.
Built on one block and still holding the other as an development site
230% increase, 550% increase respectively... Ah... NG on the first one NIL on the second.

So maybe the answer is not in Negative gearing at all!

Continued to buy into NG properties and then Cashflow presents it's ugly head and headed down the Neutral/positive track

Which is best............. Each to their own, but NG is definitely not what we buy for.

We look for Capital Growth!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

Sure you may be entitled to NG from a tax prospective but we are effectively looking to get the Capital growth rises, whether it be in shares or property.
nobody intentionally pours money down the sink....
In Property It's the long term gain were after.
And property traditionally is a long term investment
(That means do a comparisons over several year not two or three!)

Basically NG is a by product which aids to investing in IP's
NOT the reason you place any money into the market.


"If there is no immediate benefit i just wont put my money in. To do so is not investing to me, but i'm probabaly wrong there as its only my definition."

Without risk USUALLY there's no gain.
How would you judge immediate Evand?

Yes you can get ahead by playing safer and getting CASFLOW neutral or postive IF THEY ARE AROUND....... but it also tends to be risk reactive.
The gain you get from being too conservative can sometime see that Capital growth next to the turtle tracks...'Slooooow and steady'.
YET on the other scale you can LOOOSE A LOT being TOO RISKY.

Each to their own, but the long and short of it 1c3m@n is that Negative gearing isn't the reason why we buy, Capital growth, Properties that turn neutral and start paying for themselves and the Capital growth we experience in the longer term is the reason for IP investing. Short term gains is far more achieveable in the stockmarket than the property market.

 

[jingo]

I think negative geared property is the anomaly and a relative recent phenomenon. I only have anecdotal reasosn for thinking this as i have heard relatives talk of buying IPs in the 70s, 80s and 90s and they all remember it being positive.

eg: Houses in western Sydney in the 80s were about 60k to 80k and apparently pretty easily rented for $100 - $120 per week.

I suppose my business background stops me from putting money into a hole in the hope of some future benefit. I just cant see the sense in it.

I'm also not willing to sacrifice my lifestyle (if it came to that) by scrimping and saving to negative gear. To me, that would be a crazy way to live.

Benefit now, spend now is my motto.

I like your approach Evand and your references to property in earlier cycles.

I also like the approach of V8Berlina. He buys serviced apartments and pays the loans down with the rent he receives. I believe the rent covers the full principal and interest repayments. This is a smart strategy.

I tend to think of negative gearing as another means of being able to utilize other people's money (ie. the Tax office) to enable me to build up a larger portfolio. I do have an end plan though, and have calculated when the portfolio will become neutrally geared.

This is an interesting topic and I have enjoyed the discussion to date.

Regards Jason.

 

[jaycee]

wait on, the Tax Office don't let you use any of their money.....oh no no

They give you back whatever part of your money they shouldn't keep, but that's all.....

 

[jingo]

wait on, the Tax Office don't let you use any of their money.....oh no no

They give you back whatever part of your money they shouldn't keep, but that's all.....

mmm. I guess it comes down to the way you view things. Without the ability to negatively gear or salary sacrifice, the money remains with the Tax office. To my way of thinking being able to negatively gear or salary sacrifice means that I have access to another pool of cash that would otherwise belong to the Tax Office.

Regards Jason.

 

[jaycee]

yes agreed