Why negative gearing sucks!

[investor2009]

After a night of mulling things over I've come to the conclusion that my strategy is still doing good. But next time round I will be looking for a pos cf property. Many of them seem to grow at the std 7% mark anyway so you will still receive growth, just maybe not to the extent you may find elsewhere, but then again, maybe more? No-one knows.

I'm still miles ahead of the majority and if my wife and I have the option to retire by age 35-40 then things really aren't that bad.. We always want more and want the journey to breeze by though. I've started buying lotto every week by the way

 

[Seabreeze]

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.

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.

So perhaps the first statement above should read something along the lines of "Negative gearing sucks, unless you're doing it:
- To reno, add value and flip
- To reno, add value and rent at +ve CF
- To knock down, redevelop and flip, as per the business model of thousands of successful developers nationwide
- To knock down, redevelop and rent at +ve CF
- To buy a future PPOR in a tax effective manner
- To take advantage of locations where you know both rents and values are about to boom
- To take advantage of opportunities to buy properties at significant discounts to market value, re-val and extract equity or on-sell at a profit
- To just get any old low risk tax effective investment because your $500k / year job doesn't leave you any time to look for +ve CF properties and getting some exposure is better than no exposure.
- Insert any other good reason...

I believe a bit of diplomacy from both sides in this thread would have gone a long way to clarifying the real problem with Nathan's blanket and unqualified assertion. But we all know making such assertions encourages a reaction, which lifts publicity and profile and consequently makes money in other ways - just like writing a book does.

There is nothing wrong with that as long as the people in this thread know they are being played like a fiddle.

I wish Nathan well in his endeavours...

 

[Nathan]

Hi Felix,

Many people can make money with negative geared property...

But it doesn't mean that someone should listen to a property sales person and buy a property for negative gearing.

If a property is negative geared by a small amount and you make substantial gain from just buying it then this is good. It should never be the basis of buying a property in "hope" to make money "some day". If it is negative, and you can extract a decent size of equity to improve your portfolio then this is good. But just buying for a negative gearing credit is ludicrous.

People don't go to work for free, better yet pay their boss for turning up and hoping one day you will get a share in the company they work for so why would they buy a property that loses money each week with no plan in making money except from a tax credit.

Nathan.

 

[weg]

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.

If property is going to be a long term hold, it's a no brainer.

Bad times = rising unemployment/decreased business turnover = better have an extremely good buffer OR cf+ investments.

 

[coastymike]

Looks like Pete turnbulls office at zhen building nor west. Few good developers in that building. Profitable and successful ones.

 

[knightm]

This is hilarious.

Fact: Negative gearing is not an investment strategy. It is a piece of australian tax law that allows individuals to offset a loss on an ip against other income.

Fact: you don't get rich losing money

Fact: you can make money in capital gains

Fact: you can make money in cash flow

Fact: Im gonna buy Nathan's book when it comes out

 

[shuggy]

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.

That's pretty obvious with property being a long term investment . It's like saying the sky is blue or water is wet.

 

[weg]

That's pretty obvious with property being a long term investment . It's like saying the sky is blue or water is wet.

You'd think so ...

 

[Aaron_C]

This is hilarious.

Fact: Negative gearing is not an investment strategy. It is a piece of australian tax law that allows individuals to offset a loss on an ip against other income.

Fact: you don't get rich losing money

Fact: you can make money in capital gains

Fact: you can make money in cash flow

Fact: Im gonna buy Nathan's book when it comes out

Fact: The big money in property is capital gains, not cash flow

 

[shuggy]

You'd think so ...

to be honest , i took your lead .. agree that some things aren't so obvious to others

 

[buster]

more than one reason to invest.

Seems to me felix is the one getting bashed here for not agreeing with a rather silly statement. Not every-one needs to invest in RIP for income or cashflow. Some people invest in RIP as a place for storing wealth and a hedge against inflation. To preserve spending power. They can produce more income with a diversified investment portfolio investing in other areas or types of property. They use RIP for exposure to that market and the tax advantages. They PARK their money there get the tax deductions. Get tax free income from the equity in fact they get a deduction when they acess their wealth, for other income producing enterprizes/ investments (Which they can buy more of because they havent paid half their income in tax. They have that compounding plus the CG compounding) Then some of the profits may go back into RIPs. I respect and take my hat of to Nathan for what he has acheived, but I know people who have acheived more but keep it very quiet and dont make a fuss about it, although probably not at such a young age. I have noticed what spuickers have in common that is they ridicule and try to make somebody look stupid who asks aquestion or makes a suggestion that doesnt agree with the B S they are trying to push. While all the other goons sit there and suck it all in without question. Any way what I am saying I agree with felix that neg gearing can be viable, but it is certainly not for every-body, especially those on low income or without a diversified investment portfolio, or limited buffering. Neg gearing may suck but abolishing it, would suck more.

 

[Nathan]

Looks like Pete turnbulls office at zhen building nor west. Few good developers in that building. Profitable and successful ones.

One would be correct in that assumption.

He would sit above me in the building and is the owner of true Zhen complex. Only been there a few months, but good convenient building.

 

[buster]

This is hilarious.

Fact: Negative gearing is not an investment strategy. It is a piece of australian tax law that allows individuals to offset a loss on an ip against other income.

Fact: you don't get rich losing money

Fact: you can make money in capital gains

Fact: you can make money in cash flow

Fact: Im gonna buy Nathan's book when it comes out

You have to be prepared to lose money to make alot of money, If you are gonna make alot of money you will probably loose some. You just have to make more than you loose. I dont think you can get rich without loosing some money. Donald Trump , Alan Bond example s of people who got rich loosing money.

 

[knightm]

This entire thread demonstrates to me a classic flaw with internet forums.

On the one hand you get a fairly unsophisticated, but highly successful, determined and innovative young guy giving it a red hot crack....who admittedly isn't the best with the English language....but nevertheless gives it his best shot.

On the other, you've got a smug master wordsmith, with zero established real world credibility, who takes great delight in twisting and contorting truths, half truths, and obscure comments to the point that they use it very effectively as a weapon, whipping the less sophisticated into submission.

At the end of the day people, this is a property forum, where most on here are trying to pluck out those golden threads of advice that can be successfully applied to their own portfolio...to....as Ausprop so clearly put, increase their balance sheet, and P&L statements.

Listening to one of the above and taking note of their contributions will make you wealthy and free you of your job chains.

Listening to the other and taking note of their contributions will get you absolutely nowhere on the property front.

Your only task is simply to figure out which one is which.

mmm tough choice Daz

 

[Intrinsic_Value]

Negative gearing is very effective in a particular point in the property cycle, unfortunately this is not it, nor will it be in the near future.

Wrong part of the cycle to be gloating about negative gearing buddy boy.

Funny how the retail orientated and recently converted get the 'light bulb' moment, just as the seasons have turned.

 

[coastymike]

Nathan

Say hello to the crew at Guardian. They are across the other side. Nice building, good location, close to everything. Glad to see you've got your own space setup now.

 

[jonesy427]

ditto. also top bracket. works for me at the moment. my IPs wont be negative all their life with me but for now. its working and doing so well.

i think nathans point is more to do with everyone feeling that neg gearing is the be all and end all esp when they dont have the financial means to back up the loss.

2c added.

 

[Player]

Nice insights in your video Nathan, as usual

I started with heavy negative gearing type strategies and whilst it was easily serviced from income, having my time again, I think (as Mr Value indicated in an earlier post) it can work far better in a rampant bull market. Right now growth needs to be manufactured and achieved activey. Passive BHP (Buy, Hope, Pray) won't cut it for the next few years, with some regional and mining exceptions.

These days I am all for cashflow. I still have exposure to lower yielding (capital growth in so-called blue chip locales) type assets, however yield is ever more important to me. Whilst tincture of time is a great healer in heavily negative portfolios, timing and use of hybrid (combination) strategies may hedge investors in these times.

Personally, I have enjoyed Nathans posts and the energy and action that he brings to investing. I dare say that hindsight may have seen a slightly less conjectural thread header ......however, hey it got everyone talking.

Simple truth is that everyone is unique and success doesn't always mean uniformity or comformity. IMO a common factor among those that succeed (by whatever metric one chooses) is consistency or the ability to utilise stick-to-itiveness. I believe Natahn has this in spades.

Rock the house young man

 

[dan c]

Personally, I have enjoyed Nathans posts and the energy and action that he brings to investing. I dare say that hindsight may have seen a slightly less conjectural thread header ......however, hey it got everyone talking.

I think that's spot on. A couple of people were upset by what was an inflammatory thread heading. But most people could see throught the buzz to get to the actual content. And the content makes sense.

But gee, it got a bit crazy there for a while!

 

[Belbo]

Felix,

My 5 cents -

Nathan put up an admittedly confrontational proposition: In essence, negative gearing is always bad . . . for the typical property investor. And since then, there’s been a lot of fairly unhelpful slagging off between you two (which, as always, is basically unproductive – but heck – it’s been really entertaining and you’re both obviously big boys, so no permanent harm done to anyone’s egos, I suspect).

Does Nathan have the ‘Formula’? Well, let’s be fair, he’s got a very effective one going. And he has very probably absolutely nailed it too, you’ve got to admit. Nobody does with low cost homes what Nathan repeatedly seems to successfully do, at least here in Australia to my limited knowledge (or, at least, not on the public stage that Nathan so willingly and regularly presents his results for everyone’s consideration and critique).

Is Nathan’s ‘The’ formula for achieving property wealth? Not necessarily, you are right about that. As you correctly surmise, there must be – and historically have been – other great formulas, but I know that you don’t actually dispute Nathan’s success or recipe. It appears rather that you dispute his seeming one-sidedness in opposing negative gearing: Which is almost ironic really, because Nathan admits he’ll negatively gear for the ‘right’ deal in a pinch.

But here’s the really tough thing about negative gearing: It’s actually extremely risky. When negative gearing you are basically betting – yes, betting – that capital gains will eventually exceed (and quite substantially, to compensate for the added risk) all the accumulated losses you must make to benefit annually from negative gearing. Now, no-one has a perfect long-term property crystal ball, so that risk can simply never be eliminated – nor even substantially reduced. Nathan’s effective claim is that his strategy not only all but eliminates such risk, but that this is therefore highly relevant to the typical (i.e. median income) property investor who almost automatically seems to accept that negative gearing is his/her lot in life (at least in the early stages of property investing, when OTP ‘below-value’ purchasing looks to so many like such an inviting opportunity.)

If Nathan is guilty of anything it’s simply pure enthusiasm: If you’re guilty of anything it’s got to be pure literalism. Nathan point isn’t that OTP means negative gearing: His point is that negative gearing is a risk that regular folk needn’t feel condemned – nor even wise – to entertain. Your counter-point is well considered: For some investors, negative gearing – with all its risks – can be a very canny strategy, provided they have bought well and can weather any and every storm life throws at them. Many have retired wealthy this way, albeit mostly in rising markets (whether I should say ‘secular bull markets’ here, to sound informed or contra-ecclesiastical, I personally can’t discern). But Nathan’s strategy doesn’t in principle need rising markets, ever.

Nathan’s approach requires great skill obviously but equally well very much suits our risky times, and I for one applaud him for putting it out there for our considered benefit. He’s an agitator for good and plenty, for those above all that share his peculiar determination and energy.