Negative gearing is a common very common investment strategy in Australia. Today I want to ask
the question, is negative gearing worth it and when is negative gearing good, and when
is negative gearing bad, we can weigh it up and decide whether negative gearing is the
right investment strategy for us. Hi, I'm Ryan Mclean and I'm from positivecashflowaustaralia.com.au,
and thank you for watching this video, negative gearing, what is it firstly and then let's
go on and discuss whether it's going to be good or whether it's going to be bad.
Negative gearing is when we buy an investment property that in the month to month basis
it loses more money than it makes, that means we are paying more money than expenses, you've
got rent, you've got your rental manager, your maintenance, your counsel rate, your
insurances, you paying out more expenses, your interest rates as well, then you're receiving
back in income which is you usually just rental income.
The benefit of this hopefully is that the property goes up in value and you get more
capital gains than you spend in expenses and then you also can get a tax break in most
circumstances from those expenses when you losing money you can offset your income.
Negative gearing can be a good idea when you have enough disposable income to afford the
property. This means you are probably earning a very decent wage and you've got enough disposable
income that you can afford to hold the property and pay for the loses without going deeper
into debt without going bankrupt. You need to be able to generally be able to
hold the property long enough for it to go up in value, you need to be able to afford
the repayments that you need to be making, it can be a good idea if you want to save
on tax if you are a high income owner paying 40 plus percent on tax then it can be a good
idea especially when you are taking to account to depreciation of assets and stuff like that
you can get big tax refunds which could even turn under you get property into a positively
geared one, always speak to your tax accountant about tax issues.
Rental values are property or rental values are set to increase it can be a good idea
if property values are going to go up, you are going to get that capital gains and that's
going to be greater than the amount of money you put into it, it can also be good if rental
incomes going to go up because it could then move from a negatively geared property to
a positive geared property as the rents increase. If you can add value to the property you can
also be a good investment because you are gaining that instant equity through renovations,
maybe you are sub-dividing, maybe you can develop it, there are so many different ways
that you can add value to a property, if you can add value and gain equity in growth or
above and beyond what you are paying in those loses then that sometimes can be a great idea.
If you can buy the property under market value it can also be beneficial because then you've
got instant equity straight away. There are some reasons for like a situation when negative
gearing could be a good investment strategy, as always speak to a professional financial
advisor or accountant about your specific situation this is for educational purposes
only guys. What about the flip side, what about negative
gearing been a bad idea, can it be a bad idea to answer the answer is yes. Negative gearing
is not for everyone and Robert Kawasaki who is the author of Rich Dad Poor Dad, he says
is the investor who turns an investment into either good or bad investment
You can take the same negative gear property and for one investor it could be a great investment,
for another it could be a poor investment depending on your situation you need to work
that out for yourself. Here are some situations when negative gearing
might not be such a good idea, maybe you don't have a large disposable income if you are
living below the line, you are spending more than you earn or if you can't really afford
to get by, well then spending an extra couple hundred thousand dollars a week on a negative
gearing property that's going to break the bank, then you might want to reconsider your
decision to do that. If the property is not set to go up in value,
you are paying loses year on year month on month for multiple years and the property
doesn't go up in value well then you've just lost a great chunk of money and gain nothing
in return. If it's not set to go up in value it may not be a great investment, if the rental
value is not set to increase as well that could cause issues because if you are relying
on the rent to go up so that eventually your negative gearing property becomes neutral
or positively geared it might not be the best idea if rent starts to go up.
If there's no value at opportunities no development, no renovation, no way you can gain equity
from that property then it may not be the best investment.
If you want to continually expand your portfolio you really need to way up with a negative
gearing and your specific property you are looking at is going to work in your portfolio,
because when growing a portfolio you do need to way up your cash flow requirements and
your equity requirements because obviously you want that equity to grow sometimes negatively
geared properties can grow faster than positively geared properties.
If you want that capital growth you can look at that, overall if you are growing a massive
portfolio and every single one of them is negatively geared, eventually you are going
to run out of money to be able to afford those properties.
You need to way up whether it's going to help you move forward, or is it going to stop you
investing more and more. Lastly negative gearing can be a bad idea if you want to invest with
passive income and financial freedom. I was just on the propertyinvesting.com forums
this morning and I saw someone who had said that they originally started back in 2007
and they planned to buy one property every single year, they actually bought four in
the first two years but they were negatively geared them because they had equity growth
and stuff like that, they were in a better financial position than they thought they
could see that negative gearing wasn't going to deliver them the financial freedom that
they wanted. They shifted tactics and they started moving
towards positive geared properties that they could get that passive income in financial
freedom that they long for. When it comes to answering the question, '' is negative
gearing a good idea?'' It's really up to you as the investor as to whether it fits in with
your investment plan and your portfolio. I hope that you've enjoyed this video or this
podcast, I'm Ryan McLean and you can checkout this article more videos, more podcasts more
articles just like this one over the website go to positicecashflowaustralia.com.au or
if you are on your mobile phone maybe you are on the train or driving and you want to
check it out actually you probably shouldn't use your mobile phone while driving but anyway
it's pca.im is the short link and then that will redirect you straight to the site.
Thank you guys so much for watching I will see you in the next episode.