was talking with Darlene by email today (yes, my ex of '99 – we're still keeping in touch with each other on a relatively regular basis) about property investment. She's been a real estate agent and has owned a couple of houses. I asked her if she had any tips for me in relation to property investment. Interestingly, her advice was, in relation to what I've learned, bad.
Many people see negative gearing as being something of value. However….
Negative gearing means offsetting losses in one area against income from another to reduce tax. An increasing number of Australians understand this from first-hand experience. Most commonly they are using losses from investing in residential property to reduce the taxable income from their job or business.
It means that you're losing money! However, the losses you make can be submitted to the government for a tax refund. Negative gearing promotes the value of getting tax refunds, but the reality is that you're losing money on a house.
I don't know about Australia or anywhere else, but in NZ, I've learnt that negative gearing means the following: if your tax is 30% of your income, then whatever you submit as a property investment loss will only be credited back to you at 30% of what you submit.
So a $10,000 loss on a property will get you a $3,000 tax refund. This is promoted as a hefty tax refund! Woohoo!
But you've lost $7,000 that they don't talk about!
I learnt 2 nights ago how to negative gear without actually losing money. That, and other things I've learnt from a couple nights ago and over the past year, were included in my reply to Darlene. I decided to put it in here as well, just in case you can get something of value out of it as well:
I'm planning on NOT living in whatever I buy, and will only live in the house that I can pay cash for. I plan on buying cashflow positive houses, where the rental income more than makes up for the total costs of the house on a weekly basis, and gives me a weekly profit. I plan on buying 1 capital gains investment for every 3 cashflow positive investments (the capital gains investment can lose money, which will be covered by the cashflow positive investments).
Negative gearing can be done with a cashflow positive house through the use of chattels and fittings depreciation. These are costs which don't have to be paid, but depreciate on paper and cause a loss that can be claimed against. The on-paper loss causes a negative gearing situation to come into play and provide a tax refund, but in reality, the property is giving a positive cashflow each week. (Which means all cashflow positive properties, if done right, can be negatively geared in this manner.)
I don't know about Australian banks, but NZ banks will look at 75% of expected rental income to be considered in your mortgage application as your guaranteed income towards loan repayments.
I'm also looking at using equity in the house to allow me to get a loan with no deposit. If a house is valued at $100,000 and you can get a loan for 80% of the value (eg. the banks require 20% equity, usually as a deposit), then if you actually negotiate the purchase price of the house at $80,000, then you will get a loan for 100% of the price. The bank's happy because there's 20% equity in the house. Most people obtain that equity through a deposit, but if you create equity through a lower purchase price than the value, it's the same thing.
I'm going to work out a property investment strategy, and have it on this site. I'll add to it and update it as I get more information and even experience. As I progress, I'll stick to the strategy and use what I learn from the professionals that makes sense.
Negative gearing doesn't make sense when the sum total of your efforts means you lose money, and talking about a capital gains return only works after losing money for up to 20 or more years!
Why not have a cashflow positive house that's earning you a weekly profit from day one, and on paper can be negatively geared so that you get a tax refund as well! (Then you can use that refund each year to actually update the chattels and fittings!)
I'm going to do stuff that's going to make me money from day one, on an ongoing basis. Ultimately, I'm not going to pay a cent for any house I own. (Except for the one I live in, which will be paid cash from a house (or houses) that I sell. But still, considering that each house paid for itself, whatever cash I have to pay for a house will still be someone else's cash. Hehehe)
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