Negative Gearing

It's been too long since we had a good negative vs positive gearing debate, so here's some fuel for the fire ;)
This is from Melbourne's Age newspaper.


What would we do without negative gearing?
October 02 2002

In 1990, 7.5 per cent of Australian taxpayers owned rental property. By the year 2000, 12.5 per cent owned property other people lived in. And a very unsuccessful business it was.

In 1999-2000, 54 per cent of owners told the Tax Office they had lost money on renting. Alas, they had to write almost $3 billion off their taxable income. Welcome to negative gearing: the officially sanctioned tax lurk in which the government encourages Australians to invest in rental housing at a loss, write it off against tax, then reap the benefits in capital gains.

In the year to July, two-thirds of the explosive growth in home lending went to people investing in rental housing. Welfare bodies such as the Australian Council of Social Service have repeatedly urged the government to restrict or abolish the tax breaks. But both major parties say the supply of private rental housing would collapse without them.
 
Hi Felicity,

I agree that in the short term, the abolition of negative gearing would lead to a collapse in the amount of property available for rent and then cause a lift in rents due to supply and demand forces.

However, it is my belief that the short term political damage caused by such a move would blind all parties to the long term benefits of having a country full of investors:

1. Concentrating on profit rather than loss
2. Not swinging so wildly between shares and property

Regards

Glenn
 
I can see short term it would cause changes, this would cause rents to go up as more people sold, but as there would be a lot properties up for sale, you would expect prices to fall making it more affordable for people to buy homes. I could be wrong I have not been around long enough to know better, but I believe the property market would work so much better if you did not have the government interfere. I know some people do it hard, and I give full support of helping them, but it should be the communities supporting them not the government. Focus on supporting helping communities and you would help improve society .. but I guess that is to a long a view for them.
 
Originally posted by Nicholas H
I can see short term it would cause changes, this would cause rents to go up as more people sold, but as there would be a lot properties up for sale, you would expect prices to fall making it more affordable for people to buy homes. I could be wrong I have not been around long enough to know better, but I believe the property market would work so much better if you did not have the government interfere. I know some people do it hard, and I give full support of helping them, but it should be the communities supporting them not the government. Focus on supporting helping communities and you would help improve society .. but I guess that is to a long a view for them.

Having lost everything in "the recession we had to have" I have a painful memory of structural reform.

Yes we have a better economy for it (I hope-- although noone can prove that allegation). But many better people than I have not recovered and lost businesses that didn't deserve to.

My guess it will go in the too hard basket. The government removing the deduction should fall. Landlords would abandon the game, price would fall. Tenants would not qualify for loans as prices plummeted.

Yields would rise so investors with well balanced portfolios would be better off.

Institutions would still ignore the residential real estate asset class.
 
Around we go again.

For those of you who haven't got enough miles on the clock to remember - government tried abolishing negative gearing once before.

Anybody who was around then would remember the enormous public backlash to this move. Whilst politicians have very short memories for election promises, they have startling clarity when it comes to politically suicidal strategies.

Regards
Anthony
 
Thanks for starting the debate Felicity :eek:)

My preference would be that ip investment be treated more like a business. This would mean that the governemnt would only be willing to carry the losses for a certain period of time and that there must be a realistic expectation that a profit would be forthcoming within five years.

The tax department has from my understanding begun to crack down on peopple claiming loss running hobbies such as farms, holiday homes being rented out etc. This would help to focus people back onto profit which afterall is the whole point of an investment??
 
neg gearing

Hi all ,
I for one , would like to say thankyou to Jan Sommers & her books on investing .It showed me that , by using Negative gearing , you can increase your wealth over time . I have followed her recipe & in the past 6 years , have managed to bring my retirement forward , quite a few years . I also think , that if you can "MIX " your properties eg;- SOME POS & SOME NEG , you can make holding onto your investments , less stressfull ..
We are all a little different & therefore do what works you !
J W
 
A friend told me a story today of a couple she knew who have just put up two apartments they bought some six months ago, because the losses they are incurring are just too great to bear. They had to work a second job to afford to keep their IPs. This couple did not do their own due diligence and gladly accepted the Real Estate agent's rental estimation of $550 p/wk when, in reality, they had trouble getting someone to pay $350. Their costs are so large that they have found themselves having to sell at a loss to keep their heads above water. Naive, yes. Stupid, no.

There are so many investors out there who blindly go into property investment following the old adages, "You can't lose money in property", "Property is a sure thing" etc that it does become easy enough to become very blase about PI in general. With the recent booming prices, low interest rates and FHOG hanging around, it is all too easy to become complacent about the figures and just dash out and buy. After all, the equity in your own home is there for the taking, property is on everybody's lips (just look at the no. of TV shows on the topic of home ownership lately!) and finance has never been easier. Ordinary people make it look so easy that some get caught up in the hype and forget about the boring stuff- the research, the number crunching, the paperwork, the great property manager search (don't get me started on that one! Groan..........) Actually buying the property is the easy and fun part, it's all the work beforehand and afterwards that requires more attention.

Negative gearing is a terrific strategy, if you select well, if you do your due diligence and invest in an area where capital growth is consistent and strong, if you can afford the difference between mortgage payments and the combined costs of rent, rates, strata fees, maintenance, insurance,agents fees etc easily. After tax benefits should not be the main reason for buying a property. I'd much rather make a dollar today than spend $2 to get $1 back at taxtime. However, the breaks are necessary to enable people to have some incentive to keep investing in property. Waiting for capital growth and rising rents is just not enough, particularly for those on anything above average incomes.

I'm with Jim here with the mixed bag of IP's. I like to think of my positive properties (those ones that are giving me money in my pocket after all expenses) as balancing my neg ones. In the end, I aim to be as close to neutral as possible, so that I can sleep at night, not having to worry if one place doesn't have a tenant for 6 weeks or so. You also need to have cash in the bank to pay for that unforseen caved in roof, new electrical box or a long vacancy.

As for the govt abandoning the tax benefits, it aint gonna happen. Look at what a goldmine they have in private investors. Why would they want to increase their already burgeoning waiting lists for public housing? It just wouldn't make sense. History has shown that it just won't work.

Anyway, just some ramblings of mine :)
Thanks for starting an interesting thread Felicity...How's those wraps of yours going?



:cool:
 
An interresting reply Jacque , sad , but very true !
I would like to think that property WAS all beer & skittles , but from experience , I know that NOT to be the case . That is why I am about to embark on a journey into the unknown " WRAPS ", gosh , I said !
As for any further - negative purchases , I think at this point in time , I'm at my limit ..Time will tell , if I have made the correct choice , as my retirement is getting closer , I would not wish to make too many blunders...
nice to read your post...
regards to all ,
Jim
 
I read something very interesting recently at John Reed's site. He mentioned that most stand alone housing in the U.S. is negative cashflow. He also mentioned that this makes absoluite sense, cause for a property to be positive cashflow, (in most cases) the renter would have to be paying more in rent than they would be to actually buy the house. Makes a lot of sense.
Point of the story? Taking away negative gearing tax benefits will not necessarily make property cashflow positive. Why would anyone want to rent a place for more than it would cost to buy it? Most positive geared properties today are places that have been renoed or bought under value or set up as multiple streams of income properties.
I believe a lot of Aussies are getting the wrong impression of investing in the U.S. A lot of people seem to assume all property in the U.S. is positive, thanks to jackasses like Kiyosaki. From what I've read elsewhere at no-nonsense sites like Reed's this is not the case. But then Kiyosaki and others wouldn't sell so many books, seminars and games if they gave a real impression of how things are.

Mark
'no hat, some cattle'
 
G'day all,

I nowadays steer clear of posting on Negative Gearing threads as my views on this subject are well known by most from much earlier posts.

However, I'll say one thing and that is that I don't believe that any government in Australia could afford to abolish negative gearing.

Lissy posted that 54% of rental property owners wrote off $3 billion worth of income. Even at the highest of tax rates, this only represents about $1.5 Billion in lost taxes to the ATO.

I would suggest that the cost to the government of providing public housing, should negative gearing be abolished, be a hell of a lot more than that, as investors would have much less incentive to put funds into rental property investment.

The government would not only have to provide public housing, which would be costly enough, but would also have to maintain it.

Now I dont mean to offend any government employees here, but the cost of any project that a government department undertakes usually costs about 220% of what the same project would cost if undertaken by private enterprise.

I am not quoting this figure of the top of my head, this figure was given to me by a Ministry of Housing Property Officer.

He also explained to me that this is the reason why the Ministry of Housing sells older stock and replaces it with newer stock.

The maintenance costs are just too high.

Add to that the lack of "Pride of Ownership" that most public housing tenants suffer from and you'll find that Public Housing has extraordinary high maintenance costs over comparable private rental properties.

As Anthony wrote, the government once before abolished negative gearing and the enormous public backlash had them re introduce it.

Now I wonder, was it the enormous public backlash from private rental property investors that made them re introduce it.......or maybe, was it the enourmous public backlash from people on the never ending waiting lists for public housing that actually had politicians falling over themselves in a rush to allow negative gearing deductions once again.

The property investment game plan remains the same, the road chosen might have to be deviated sometimes to allow for surface irregularities but as long as we move in a forwardly direction we all are getting nearer to the eventual destinantion.

Governments and their policies will come and go, but everyone needs a roof over their head.

regards
 
Markets work

Typically, properties in lower socio-economic areas tend to command higher rental returns and are likely to be cash flow-positive. But in all markets there is no higher return without higher risk. (And lets put aside capital growth, which was discussed here many times before.) What risk am I talking about? Ok, firstly tenants defaulting on rent payment due to insufficient income. Secondly, bad tenants trashing the place. Another factor is typically higher managing agent fees (percentage wise). In Sydney's wealthy Eastern Suburbs agents charge 4%, in regional QLD over 7%. And it generally takes the same effort to manage a property in Sydney and Queensland, so to make their $700 / year on a rental property an agent would have to charge a higher percentage in QLD.

As a matter of interest, has anybody seen any statistics giving a breakdown of number of bad tenants by area or by weekly rent?

Say cheese :p ,

Lotana
 
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