When you negatively gear, after the mortgage is paid (and any other running costs) your rent doesn’t cover the outgoings, you have no extra money left over every month. In fact, you’re losing money because you must cover the shortfall.
Does negative gearing make good business sense?
Yes, sometimes.
But be careful. I personally believe many Australians have been misled by financial advisors and accountants who encourage us to buy negatively geared property for tax benefits.
Property Prices Do Not Always Increase
Many investors rationalize that they should negatively gear because their property will increase in value thus increasing in capital gain, over time. Yet they don’t realize that property follows cycles. There are times when properties don’t increase in value like during the late 1980’s in Australia.
When I lived in the United States in the early 1990’s, I saw property prices plummet for various reasons. It does happen- just like the internet bubble bursting.
Also, most investors don’t realize that the banks will cut off your lending-very quickly-after you buy more than one negatively geared property. Banks want to see the debt paid down before they lend you more money. Or see your income increase to continue servicing the debt.
And with rising interest rates, the negative gearing gap just got wider. It means you have to dig that much deeper into your pockets to cover the short fall every week.
Here’s a quick review why negative gearing doesn't always make good business sense for many people:
Capital gain is not a certainty. In the late 1980’s in both Australia and United States, the predicted capital gain didn’t occur.
Can you afford the weekly loss? Where will you get the money every week to pay the difference between the mortgage and your tenant’s rent?
Rising interest rates will continue to increase your monthly shortfall.
The bottom line is this: many of us can’t afford the weekly loss from a negatively geared property-even if we have the best intentions to offset our tax.
And that’s backed up by the Australian Bureau of Statistics who found in 1997 that only 6.5% of all income earners owned or partly owned residential rental property.
I believe more people would confidently invest in bricks and mortar, if they knew how to make positive cash flow.
Back to the original question, I believe you’re better off getting positive cash flow now. Negative gearing stops people from investing. More people would invest if they didn’t have to worry where the money would come from each week to fund their property.
Positive cash flow takes the pain out of investing in property. You’re not scrambling to find money to pay for your negatively geared property. Your lifestyle won’t change. And you won’t be limited to one investment property by the bank. Finally, when you make extra money every month-positive cash flow-it gives you choice. You decide how to allocate your profit.
Once you begin with one positive cash flow property, imagine the power of building your investments from 1, 2, 5 up to 10 or more properties. Imagine the choices you will have. Perhaps you can leave the paid work force and live off the positive cash flow. Or give to your favourite charity. Fund your children’s schooling. Retire early. Free up your time to spend it the way you wish.
If you want positive cash flow, it’s not enough to find the right property to purchase. You are better served to find a complete system that will take you step by step on how you can make positive cash flow.
If you’re interested in a positive cash flow system that:
Gives you positive cash flow that can be adjusted even as interest rates rise
Gives you positive cash flow even in areas with low capital gain
Gives you positive cash flow to acquire more properties
Gives you positive cash flow in order for you to build a stream of income
Gives you positive cash flow in order to build a business
Gives you positive cash flow now
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