Globetrottie 

Disadvantages of Negative Gearing

 

17.02.15

So, if you read my other post about the power of negative gearing, you may find that it is a powerful tool to use our salary to fund our properties. And reducing tax of course. 

 

However, there are always 2 sides of a coin. There are many strategies out there, and I chanced upon an opinion leader Ryan McLean who proposes positive gearing as a preferred choice.

 

To just refresh your memory, Negative Gearing is a strategy where a property makes negative cashflow ( you have to use your out-of-pocket money to fund the property... cos expenses > rental income), but waits for property to appreciate, and then extracting the equity to purchase another property. 

 

These are the 5 reasons why some investors don't do Negative Gearing!

 

1) It eats your cashflow. Every month you are just paying hundreds of dollars, sometimes thousands to fund your property. You are bound to job!

 

2) To make money, you have to sell your properties--- subjected to Capital gains tax. Also, once you sell, you eliminate your chance for future gains. For example if you held a property for 10 years and made a profit of $200k. If you held on for another 10 years, it may just make you a profit of $400k. It could be a family or health crisis that requires you to liquidate. Yet, if you compare with another portfolio bringing in $500-$1000 per month, you wouldn't have to liquidate your good properties! 

 

3) You have to borrow against equity. So if you can't pay for the second property, you run the risk of losing the first. 

 

4) Number of investments kept low- you only can buy as many as your salary can hold. 

 

5) If the market is down or stagnant, you have absolutely no way of making money.

No access to equity. If you sell, you are going backwards. Instead of acquiring more, you have just lost one, and another one, and another one... We only get older and closer to retirement, unless you are Benjamin Button. For many who have received the Golden Handshake (Thanks, you are OLD and your services are no longer required), you may find yourself in a situation where you cannot afford to fund your negatively geared properties anymore. 

 

There are ways to generate positive cashflow in a negatively geared property, but only if certain criteria are met. I will update in another post at another time!