I grew up in Sydney in a family who were reasonably active property investors. My father from a young age used to tell me about the tax benefits of claiming a portion of your tax back from owning property. I understood the greater the loss on the property the less tax you would pay, and that sounded great! This was the property investment strategy my father and many others I knew relied on when investing.
I learnt that owning a highly negatively geared portfolio results in an asset rich but cash poor situation. This position was created by a high proportion of my father’s salary going into covering the costs of his investments. Although my father’s net worth was growing (well at least most of the time), he had to always keep his job to fund his properties.
Nowadays, I view negative gearing in a more cynical way than my influences did. When I carry out due diligence on a property purchase, I treat each investment property as a business, the same way you would as owning, let’s say… a café. To illustrate my point I’ll ask you a couple of questions:
Q: Would you operate a café year after year at a loss?
Q: Would you work in a café in the hope that in 10 years your boss will give you some equity in the business?
I would be extremely surprised if you answered, ‘yes’ to either of these questions.
In theory, a negatively geared investment is no different from operating a café at a loss or working without a salary for years in the hope your boss will give you some cash at the end of your employment.
Many property investors in Australia embrace and preach this ridiculous situation.
Don’t get me wrong, negatively geared properties can be converted into positive gearing, however why would you enter this arrangement if it could avoided? The real answer is people don’t have the time or know where or to find a quality positively geared property.
This is where Rethink Investing can help you, as we specialise in:
- Searching for and buying positively geared properties
- Under market value opportunities
- Properties with high growth potential
At the age of 22 the bank gave me approval me to take out a home loan. Using a deposit I had been saving since I was 17, I was in a rush to buy a property.
Initially I was determined to purchase a unit worth about $400,000 to live in near the suburb of Miranda in Sydney. After a few months of searching and being outbid at auctions, I stumbled on a cheap house in Sutherland, Sydney. This house was not what I was initially after, as it was not ‘nice looking’ like the units I had been looking at. To my father’s credit, he encouraged me to forget the units and go for the house. One day later, I had signed a contract for a $480,000 purchase.
Without even realising, I had just acquired a positively geared investment in a high growth area. The property had a three-bedroom house at the front and a two-bedroom granny flat at the back. The combined rent was $790 per week!
This lucky break awakened my interest in property, as I could see there was more to property investing than claiming a tax deduction on my losses. Due to the extra income from this purchase, I could save much faster and bank loans were easier to come by for my next purchase.
Since this first house, I have bought another 25 properties producing a passive income of over $270,000pa. This income has allowed me to ‘retire’ from my job. This is only possible using the positive gearing strategy.
Remember, cash flow positive properties create extra taxable income. Some people I meet are concerned about paying more tax due to their increased income.
I’ve never understood the fear mentality behind paying more tax due to an increasing income. To me it’s simple; if you pay more tax you’re making more money!