Why Negative Gearing is a Losing Strategy

Why Negative Gearing Is A Losing Strategy

I find it absolutely bizarre that people invest in real estate in order to receive tax
deductions rather than looking for a return on their investment. In other words, they lose money on their investments so they can claim the losses against their taxes.

They call it negative gearing.

A negatively geared investment is a business which you’ve deliberately structured to run at an operating loss. You do this by borrowing so much that your interest payments exceed the rent you receive from the property.
Why would you do such a thing you may ask?
People do it because the loss is tax deductible and since most people hate paying taxes, they would rather lose money on their investments, than pay the taxes. If you are in the highest tax bracket in Australia, you will receive a tax refund of 48.5 cents for every dollar of your negatively geared loss.
What this means for you however, is that you still need to cover 51.5 per cent or more of your loss from your after tax earnings. In other words, for every dollar you spend on a negatively geared investment, the tax man will only give you 48.5 cents back.

So, for as long as the negatively geared investor keeps their property, they have to keep shelling out more and more of their hard earned income to keep their investments afloat. (No wonder so many negatively geared investors get sick of losing money and sell out after only two years).

Now I don’t know about you, but I’m not particularly fond of losing money. I’m
interested in making a profit from my investments, not a loss.
Negatively geared investors go in for such deals in the hope of selling their property for a huge capital gain in a few short years. While it works for some, most such investors soon tire of the constant cash outflow and cut their losses by selling out.
Those that seek to grow their property portfolio in this way, eventually reach a point where they can no longer obtain finance to buy another property. With each property they buy, they need to put in more of their personal exertion income.
Even though the properties may be appreciating well, the negatively geared property portfolio still requires ongoing external cash resources to pay the bills and more particularly, to service borrowings and other outgoings associated with holding properties such as rates, repairs,management fees, insurance and strata fees.
I’ve heard more than one negatively geared property investor lament: “I invested in
property so that I could eventually leave my job but now I find that the more properties I own, the more I need my job to keep paying for the investment properties.”

A much smarter way of investing is to find properties that will put money in your pocket.

This is called positive cash flow real estate investing.

Hans Jakobi’s www.RealEstateInfo.com.au