Accountants are finally waking up to the fact that negative gearing is a dud strategy.
I’ve never been a fan of negative gearing.
I’ve seen it hamstring too many investors. Just as they’re getting a bit of traction with their portfolio, the banks look at their expenses and cut them off.
And that leaves them stuck.
But that’s actually the best case scenario. That’s what happens in a market that’s rising.
Because it can actually get uglier than that. When prices start to soften and fall (as they inevitably do), then investors find themselves stuck with an asset that’s bleeding them dry, and doing nothing for their equity position.
It’s still strange that I’m being a bit radical when I say this. That I’m flying in the face of conventional wisdom.
I mean seriously. I can’t tell you how many stories I’ve heard of accountants instructing their clients to buy a negatively geared property just for the sake of it. “Oh no, just go out and buy any old thing – as long as it’s losing money, we’re all good.”
Madness. And I think we’re about to find out how mad this is. Because right now, across Australia, I think people are waking up to what a dud negative gearing actually is.
Like this accountant from this story in the AFR:
Allan Smith, a Queensland corporate accountant, is selling the investment property he bought 10 years ago because he is “tired of losing money” and wants to get out before there is a market crash.
Mr Smith’s three-bedroom townhouse in Helensvale, north of the Gold Coast, cost him about $300,000 and has returned only about 20 per cent in capital growth, or about 2 per cent a year, which is less then he could have made on a fixed-term deposit.
The property has been no problem to rent but income did not cover total costs and has been negatively geared…
… Mr Smith, 45, is planning to reinvest in a balanced portfolio of equities and fixed income generating a return of about 6 per cent.
Yeah, good luck with the stock market Allan. See how you go.
But the problem here is not with investing in property. The problem here is with this style of property investing – buying ordinary properties that lose money, and then just hoping that the market goes up and you make money.
And I get why he wants out – why he just wants to sell up and move on.
Trouble is though, when the market is losing ground, who wants to buy a negatively geared property? If there’s no promise of future capital gain (or it’s a distant promise), why would someone be willing to wear that loss?
Fortunately, selling up isn’t the only option. There are a range of strategies that improve the yield of a property – maybe its renovation, maybe it’s short term rentals, maybe its boarding houses… there’s a number of options.
But you’ll need to know what you’re doing. You’ll need specific, expert advice.
Unfortunately guys, you’re accountant is just not going to give it to you.