Why negative gearing sucks!

[Nathan]

Hey Nathan,

Enjoyed the video and perspective as always

With regards to the above, I like to look at it that should the $200,000 property in western sydney go up 10% then you've had a $20,000 gain

With regards to the above, I like to look at it that should the $2,000,000 property in mosman go up 10% then you've had a $200,000 gain

Hey RW,

Hope you have been well.

True, and good point, but also comes down to the serviceability of the $2,000,000 property as being cf+ neutral or cf-?

I like bigger parcels but you know what I mean, the 10 x 200k ones are easier to hold and have got an easier scale of growth.

 

[RedCat]

I reckon a decent amount of people that are negative gearing probably earn a bit more than $50k a year and can afford the initial losses.

The main bit that bugged me about the video was when you say you bought a property for 50k and sold it for 100k and made 50k profit. To represent the numbers fairly, you could have considered saying you made $X profit after you paid RE agent and capital gains tax etc... Considering some of the people watching will be more novice than even I am.

 

[JWR]

Come on guys,

Nathan is just trying to help those who are still learning - if he makes a little bit of money from it, who cares. You are making an investment that enables you to use his knowledge and expertise - and you will probably find you get more than what you paid for out of his services.

Obviously everyone's strategy is different. Nathan's works for him. Yours may work for you. You shouldn't be attacking him mercilessly for being a good guy. I'm sure everyone who watches his videos would say they have at least learnt something from it - so I think its time to lay off.

 

[weg]

Ok, I will do a quick little example of how great negative gearing is....

$50,000pa salary.

Now buy a property for $400,000 rents $350pw or $400pw and its negative after all expenses by $200pw.

$200 x 52 = $10,400 loss.

So balance sheet position is $50,000pa - $10,000(round numbers) = $40,000pa.

Now add another neg geared property, thats $40,000 - $10,000pa = $30,000pa.

Thats two properties and your now on $30,000pa and not paying tax. Whats the lifestyle chance from $50,000 to now $30,000 income.

Now what is the plan moving forward to save a deposit? you can't save now because the properties are eating all your cash-flow...

Its all a vicious cycle and have seen all too many people buy into this recently and thought I would share.

I don't need to clarify anymore but this is the moral of the story, negative gearing sucks.

I was trying to make this exact point in another thread 'why investors stop after 2 properties'.

 

[Nathan]

I am one of the most open people you will come across so don't tell me or those on this forum I am not open from your narrow minded opinion.

Negative gearing is not a viable investment strategy, I say it, stand by it, and even have it written down in my book arriving on shelves shortly. (Before you say I am sprucing a book $2 profit a book aint going to make me rich).

I dont agree with it, never agreed with it, and never will.

Lets look at this another way....

Your $400,000 property is negative geared by $10,000pa in 10 years this is $100,000 you have lost. Your property must go up $100,000 to come close to breaking even without including entry or exit costs. Its investing money and praying/gambling on an outcome which will be greater then $100,000 growth to get some of your money back.

But then again, I guess you haven't been exposed to thousands of properties in the market place looking at REAL NUMBERS of what people paid for a property 5 - 10 years prior for $100,000 more have you?

Valid points or not valid points, its an alternate view and its a water tight view point. I personally see lots of holes in your view point and this is your opinion.

I guess this is why there is ever a disagreement is because two parties are both right in their own head. I see in this case my view is right on paper and hence why I decided to share it via a video.

Nathan.

 

[RedCat]

Nathan,
I admire what you have been able to accomplish at such a young age.Even more, you are trying to encourage others, that it indeed is possible, with a little (lot) of hard work.

I find it hard to understand investing in property, and not really being interested in it.
My eyes light up when I talk about it...it's fun!!

Nathan,
I admire what you have been able to accomplish at such a young age.Even more, you are trying to encourage others, that it indeed is possible, with a little (lot) of hard work.

I find it hard to understand investing in property, and not really being interested in it.
My eyes light up when I talk about it...it's fun!!

I will explain. First time I found myself with $40k above my normal wage I blew the lot in about 2 months on having fun and buying two (yes two) hot stereo systems. I'm married to someone even worse. Four weeks ago we each got a $3k bonus. He blew his in a week and doesn't even know how. I still have every penny so I'm improving.

The second time I had a cash injection 13 years ago, I bought a crappy 2br in North Melbourne. Another injection shortly after had me renovating it. I sold it 12 months later and made $60k profit (after expenses) and bought 2 more. hated every minute of it mind you.

I guess only way to guarantee spend thrifts like us can get ahead in some way
is to put the money into property so we can't get our hands on it daily and throw it down the toilet and end up on commission housing trying to sell our once expensive crap in a pawn shop for $5 so we can eat.

If my husband has $100 in his pocket, it's gone by the end of the week. If he has $1000 it's also gone in a week. On nothing. I'm protecting our future. I don't have to love property to do it. I hate shares even more. Set and forget for 10 years. Perfect for me.

 

[JWR]

Hi Felix,

I pretty much agree with Nathan's strategy - its along similar lines to what I am hoping to do - and this was made up before I met Nathan - except I am looking to buy in regionals mostly for yield but trying to pick the right areas carefully so that I can make growth - like Lomas.

I was just stating that everyone has their own strategy so they should stick with it if it is working for them. Its hard to argue Nath's isn't working though!

Maybe try to be a little nicer to him though - because he has a lot to offer so you may not agree but shouldn't discard either. Maybe he isn't the best with how he portrays his info to audiences - he is not trying to 'spruik' - but I am sure you can see the essence of what he is saying. There's no point in him spending hours brushing up on his diplomacy when he could instead me making lots of $$$ looking for the next deal.

 

[Nathan]

I don't think positive gearing is great either.. but having money flow in is better then it flowing out and means you can service loans with the banks and continue to build your portfolio. If you had two properties which rose in value equally, would you rather have one that a) costs $100pw to hold b) costs nothing each week to hold c) puts money in your pocket each week?

Why you assuming I am a cult?

Im making a a giant knob of myself? - Who cares? I don't believe I am by discussing a very important topic. I may look like a knob to you because there is some animosity between us for some reason you lashed out at me.

I will not reply to anymore of this nit picking, its not worth it. I have got better things to do then argue. I wish you a prosperous life.

 

[RedCat]

Sorry for the double post above. Can't work out this iPad.

Just one more response Nathan re the losing $100k over 10 years on a $400k property post above. You haven't calculated tax and depreciation. If someone is paying 47percent tax on their salary, then they are not going to be losing $10k a year once they get their tax returns back.

 

[JWR]

Ok Felix,

I am done too. You are obviously just looking for a fight for some reason. I am just trying to support Nathan since it was 2 against 1.

Nathan always advocates that you should do whatever works for you. i.e. he does reno's and flips - I have no idea how to do them so haven't tried to yet. And to clarify; I disagree with negative gearing for the average person as it is too risky (i.e. you lose your job then you lose your house.) I totally agree with it if you have a track record and can see growth/yield drivers that will likely turn it positive sooner rather than later - or if you see development/subdivision potential.

Try not to get too worked up over the small issues It really isn't important. If we spend time trying to make money instead of arguing we would be far better off.

 

[JWR]

Ok maybe he hasn't advocated to use your own strategy in this thread but I'm sure if you read other threads you will change your opinion.

I do agree with him - please stop putting words in my mouth. I am just trying to see your viewpoint also.

Perhaps your pent up resentment is actually jealousy? Dw though - I am jealous of most people here too - I've only got 1 property so far - but +ve cashflow (don't shoot me!)

 

[locko24]

How's this:
Negative gearing is akin to taking a gamble on cg.
I want to be certain of making money.
I guess it's possible to become rich using ng. I don't know anyone who has. (i define 'rich', as making over 1 mill per year)

Await your reply with bated breath...

 

[JWR]

a. -ve gearing and OFT are much of a muchness

OFT is directly correlated with -ve gearing. It is not the same thing, but often has the same end result.

So yes, I agree with this point

b. No one has ever made money out of -ve gearing?

Obviously you can make money out of this strategy. Whether you can make the optimal amount is up for debate though.

Is it wise to buy 3 houses -ve geared and make lets say $1M when in the same period you can buy 30 houses positive cashflow which keep making you more and more money each day - and will more than likely earn you much more than $1M over the same time period? Not to mention having very little stress regarding the holding costs and worrying about losing your job.

It is the opportunity cost of the capital you are using. Whilst I said earlier that Nathan may not be diplomatic in his offering of information to the public; you would have to be an idiot not to understand the essence of the info he is outlining - that negative gearing does suck, because to the average person you can make more money through positive gearing with much less hassle.

Did I answer you well enough teacher?

 

[IFBB]

Back on topic slightly.|

Nathan, finding properties below market value - is it as easy in metro areas as regional?

When i look, anything gets snapped up straight away, and im sure the few parties interested pushes it pretty close to market value regardless.

Is it a few KPIs such as "rent vs rent after reno, cost unrenovated vs cost of property after a reno", or is it simply knowing many REA?

 

[HomePage]

Despite all the noise in here, this is a great thread Nathan and has confirmed to me that -ve gearing is a very slow and painful investment strategy that struggles to add up in the absence of strong capital gains. Keep up the good work, despite the annoying naysayer.

 

[JIT]

Hi All,

I get suspicious when anyone says things like:

"Negative gearing sucks!"
"Negative gearing is awesome!"
"Positive gearing sucks!"
"Positive gearing is awesome!"

A lot of the comments in this thread show to me a lack of understanding about how and why we use residential property as a foundation for creating wealth.

With regards to negative gearing...

We don't negative gear just for tax breaks.
Losing money is not great because we are reliant on our JOBs to hold on to the properties.
And not all negatively geared property will stay that way forever (depending on what type of property you buy eg. units/apartments/townhouses vs. houses, or new vs. old etc.).

With regards to positive gearing...

The income is great as we are not reliant on our JOBs to hold on to the properties.
A positively geared residential property may not be very positively geared at all after taking into account 20-30% of gross rent as property expenses, a few weeks or more of vacancy... and of course income tax.

Negative and positive gearing are just two sides of the same coin.

Ultimately what matters is not whether you are negatively or positively geared, but whether the property you are invested in creates any CAPITAL GROWTH / EQUITY.

And secondly what matters is what you later decide to do with that growth and equity...

Whether you are negatively or positively geared in residential property makes no major difference if the property you have been hanging on to for 5 years has had no capital growth and equity.

Which approach you use (and you can use a combination of approaches), largely depends on your income.

ie. If you are on 500k pa, you would need 200-300 cash flow positive properties worth $20-$30M to replace your exertional income... why would you do this to yourself?

If you are on 50k pa, and you bought negatively geared properties, you would hit your serviceability limit after 1 or 2 properties... so again, why would you do this?

So no, negative gearing does not suck and positive gearing is not the holy grail of residential property investing, and the reverse of this applies too.

My view with residential property is that you need to aim for neutral gearing, and then leverage off this into higher yielding assets eg. kiethj (shares), Dazz (commercial property).

Residential property is primarily a growth asset, not a cash flow asset, and one should not lose sight of this. It is a great way to create equity and a foundation of wealth. That equity can then be used as a low-cost (ie. low-interest) source of finance for you to leverage into other higher yielding assets. This funding source, unlike cash in the bank, will continue to increase passively as the value of the underlying property also increases over time.

As per these old threads below:

http://www.somersoft.com/forums/showthread.php?t=38260

http://www.somersoft.com/forums/showthread.php?t=38186

 

[dan c]

If you had two properties which rose in value equally, would you rather have one that a) costs $100pw to hold b) costs nothing each week to hold c) puts money in your pocket each week?

The answer to that is obvious.

But assuming both rose in value equally is a big assumption. Many investors have become rich after INITIALLY negatively gearing their property, because of the capital gains. As you have said yourself, capital gains make you wealthy, not rents.

 

[cu@thetop]

An very successful property investor client once said to me: "You need to be able to hold the property in bad times as well as good times

And in that statement I found a lot of wisdom.

 

[Nathan]

An very successful property investor client once said to me: "You need to be able to hold the property in bad times as well as good times

And in that statement I found a lot of wisdom.

Thanks cu@thetop

This is the point which is underlying here.

We want growth and having neutral - pos cf enables you to hold more properties which in turn means more growth...

By the way also to clarify, I have properties which are fairly neutral today but when acquired they were $100 - $150pw negative. You hold half dozen of these and your lifestyle choices aren't the best. So I am talking from experience as well. I did buy these with a plan through and they were because with cosmetic upgrades I could pull equity, s these properties were bought with neg gearing for purpose of extracting equity.

 

[Melbournian]

it really depends on lifestyle and personal circumstances.

some dudes on this forum might be earning 300-400K (not me) and would be in need of negative gearing where else others on lesser incomes would be aiming at more positives gearing.