February 6, 2012 by Dymphna 6 Comments

Episode 9: I HATE Negative Gearing


  • Why negative gearing is not such a smart investment strategy
  • The dangers of buying into the “new property is better” investment myth
  • Why the banks love negative gearing
  • Why negative gearing could keep you trapped in a job for 20 years
  • How to create a better investment plan that creates positive cash-flow rather than negative results

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Please remember that these are direct transcriptions. In the interest of getting this to you in a timely manner, grammer, punctuation and spelling have not been corrected.

Hi guys, Dymphna here. I hate negative gearing. You know it’s tax driven poverty. Now hate is a very strong word and I would rather always put things in the positive and say I love positive cash flow. But I guess I had to get your attention nice and early. I believe negative gearing is the single strategy that has kept people from achieving goals; from being able to quit their job; from being able to do all the things in life that they want to do. It is the one thing that has been shoved down our neck since 1985 when the things like depreciation and the ability to be able to deduct interest from against an investment property. And property losses were able to be deducted against our salaries. And ever since that time, what’s that now? Twenty odd years ago our society has been molded into this state of depression. It really has.

This comes to mind because I was talking to one of my students last week. And I was only thinking about her this morning. I thought you know what; I really want to do this little recording for everybody just to really highlight how this strategy keeps us impoverished. It keeps people in a down trodden state. It keeps people obedient if you like. Obedient to the cause; whatever the cause is I suppose.

Let’s just talk about my student. Now these couple they were, I guess they were in their early 50s. They worked hard. They raised two children. Both of them had middlish kind of jobs. I think one earned about $55,000. I think the other earned about $65,000. And they owned a house and they bought that house 30 odd years ago and they progressively paid down the mortgage and redrawn to buy a car and a few other bits and pieces along the way. And then about I suppose 10 years ago they got caught up with what I call two tier marketing crap. Now two tier marketing is actually something that’s illegal. So that’s not really what they are. But basically they’re oh guess, shuto educators who sell property. And they sell property in their own developments and they cut deals with other developers to get bulk deals and typically the prices are inflated anywhere between $40,000 to $50,000. And there’s always a good story behind it about how to growth area. Or it’s in a growth corridor. This shopping center is going in and that shopping center is going in. There’s always a good story behind it. But if you look a little deeper and you know anything about economics, which obviously I teach you guys. And you look beyond the superficial; you can see that a lot of these places are going absolutely nowhere. And you start doing a few calculations like grid variance analysis and the depth in the market and all that sort of thing. Which all my ultimate students know that they know how to do that stuff. You can see that there’s a lot of cloak and dagger type stuff behind these sort of properties and behind these kind of people. Anyway, I’m not here to talk about that.

What I’m here to talk about is what they ended up getting sold. Now typical house and land package in the burbs where it supposedly is this great growth corridor and how it’s going to double in value every five years or something ridiculous. And you know they were just sold on the strategy because I guess they were sitting back thinking okay well you know we’re getting closer to retirement. The kids are getting a little bit older. We’ve got a little bit of equity in the house. We should start to think about improving our situation and start to get on to a track of building wealth. You’ve heard about this property stuff and property sounds like it’s something that is a little bit safer than shares. And so that’s what they did. Unfortunately they caught up with the wrong crowd and they were sold first of all, one negatively geared investment property. And how new property is so much better than everything else because it gives you the opportunity to depreciate more and to claim more as a tax deduction.

Well you know that’s true. And in the sales pitch that they go through what they say is true. But it doesn’t say all the story and it certainly doesn’t look at the big picture of what these people actually wanted. The lady wanted to give up her work. She was getting tired of the job. She had a boss change. She hated the new boss. And she needed to give up work because she wanted to give up work. She couldn’t give up work of course because financially they couldn’t afford it. And the gentleman well he was okay plodding along for a little bit longer. He had a little bit **** but not a lot. And their goal was to kick back, have a bit of an easier life. So what were they sold? A negatively geared investment property; house and land package where it’s the standard four bedrooms, two baths, two garages, the same as every other one in the street, all suburb for that matter. It holds this whole suburb down. We’ll talk a little bit more about that and how that works later. But they were sold this generic variety product. The marketers who were selling her the product was picking up between $40 and $50,000 in the process. Whereas if they had been a little more educated they could have gone out and bought the land themselves and built themselves for well saving at least the $40,000. And if they were a little bit smarter about design and other things they could have had something that was $40-$50 grand on the market value from everybody else in that suburb. They could have built something more cost effectively. And they could have built a design that would have given them a better cash flow than the one that they ended up with. But they weren’t educated and they got mixed up with this negative gearing crowd who just wanted to really sell them a property and pick up their $40, $50,000 to throw.

So they ended up with this property after the build time and it took six months, eight months, 12 months, whatever it did. And the property is negatively cash flowed. By the time you rent it out, there is still a short fall between what it’s actually costing you. Now there’s another major, major downfall in this little strategy here that is sold as being the salvation to the world and how you’re going to be able to retire and all these kind of rot situations really. I mean eventually the property will go up in value. But it’s going to take a very long time to recover from the $40, $50,000 over pricing to start with. And then market is settling down and the aging of the suburb and; there is a lot of factors that have to come into play before this is every going to look after itself or any increase in value to any great extent anyway.

But the property was negatively cash flowed. Now what that means was that they had to put up money. So they had to either find that money somewhere else and work harder to get the money to put towards this property or they had to cut back on something else. They had to cut back on a lifestyle expense in order to have the money to put towards owning this extra property. But the worst thing is well they put it in their own name. Which of course they were sold as being the right thing to do because obviously having it in your own name you can claim it against your salary and offset your tax and who wants to pay tax. Oh yes, let’s get out there negatively geared. Lose money on purpose just so that you can save 30 cents in tax. Seriously! Think about it. You’re on purpose loosing a dollar so that you can save 30 cents. That’s what negative gearing is. It’s as ridiculous as the argument that you hear from the pensioners talking about oh no I don’t want to make too much money. No, I’ll just put it in a low interest saving account because I don’t want to make too much money on it because I’ll lose my pension. Oh what? Oh we won’t even go there.

But let’s get back to negative gearing. They put this thing in their own name. Now anyone who’s ever seen me speak had heard me talk about asset protection and just how dangerous it is to have properties own in your own name. And to have these properties available for risk and most people have got their principle place of residence or the home that they live in, in their own names. Yet going and putting a second property in their own name, a burglar can break in. They can trip over the fire hydrant in the front lawn and sue you and not only take your investment property but they’ll take your home as well and your boat and your Caravan and whatever else you might have. It’s not the thing to do. Asset protect, make sure that any litigation that ever comes your way and believe me it is fair more rampant than you would even possibly imagine. A lot of this stuff doesn’t hit the newspapers like it should.

Anyway, they had to put it in their own name of course to get these tax deductions. So they’ve ended up with a property that is costing them, once you pay for your rates and your insurances and your management fees and all the rest of the stuff, it ends up costing them about $8-$10,000 negative cash flow. Now you say it in round terms like that, it doesn’t sound, oh that’s not too bad. That’s $200 a week. Are you kidding me? That’s $200 a week that you have to go out and earn somewhere else in order to be able to afford to have this property or you cut down on your expenses. Your holiday or the second car or in this people’s case, they had a bit of a yen for old motor vehicles. So they put that extra money that was going into something that they both enjoyed into owning this property. And then a little while down the track of course the telemarketers hop on the phone and they sell them another one. So not only are they $8-$10,000 negative cash flow on the first one but they’ve got themselves signed up for a second one. It is only $1,000 you have to put down. And we’ll go and get a 90% loan for you and of course by the time we cross securitize all your properties and put your investment property and your home and the new investment property all with the one bank so that you end up having; you know you’re beholden to this bank. And the bank starts telling you what to do and starts being able to dictate terms to you. I don’t like being dictated to by anybody. But particularly from a bank who probably knows less about investing than I do.

Anyway, that’s what happened. They were cross securitized. Of course when you sign a mortgage with a bank there’s a clause in there called the all monies clause. And the all monies clause basically says that they can come and take any property that they the bank has a loan with. Now the bank manager will often say to you oh no it’s not cross securitized. Definitely not. It’s a separate loan and all the rest of it. Absolute rot. Garbage. That is not the case at all. As soon as you have more than one loan with one bank those properties are cross securitized. Now obviously if you’ve got a lot of properties you can’t go and have each property with a different bank because in Australia there simply are not enough banks for most people. So you end up having a group of properties with this bank and group of properties with that bank. And you start to spread yourself around that way. But that’s at the bigger end of the scale. These guys, they only had three properties. And of course true to form they paid $40 – $50,000 over price on the first property, on the second property I mean and they borrowed 110%, 115% by they paid all their fees and charges and mortgage insurances and all the rest of the stuff that had to come into play to buy this property and of course it’s negative cash flow the second. So another $8 or $10,000. So suddenly you’re somewhere between $15-$20,000 negative cash flow a year. That’s a big chunk out of these guy’s wages. Particularly considering the $55 and $65,000 that they get is gross. They got to pay tax out of that. They’re sure the negative gearing reduces that tax a bit. And you know puts a little bit back in their refund check. But remember it’s your money in the first place. And it’s money that you’re effectively loosing.

Now by the time these guys came to me and I was chatting to them about their circumstances and what they wanted to achieve. When I said to them okay what are your goals? What do you want? The first thing that came out of their mouth was that she wanted to quit her job and she wanted to have an easier life. She wanted to be able to be in her words financially secured, financially free. And that was the whole purpose of them getting out there and buying these two negatively cash flow properties. Now these two negative cash flow properties basically ruined these guys. It meant that all the equity that was in their home is now being used up as in cross securitization. Cross collatorized with buying these two investment properties. The market of course has gone into a, not really a slump, but it slowed and gone flatline. But these properties, because the market in these particular suburbs has dropped because the marketers have pulled out. They’ve moved on. Those people who have bought the property, **** on the market and they haven’t got the marketing machine behind them to sell these properties. The market has dropped. And guess how much it’s dropped by? Surprise, surprise. It’s dropped by that $40-$50,000 that these properties were marked up by. Because when you look at these new house and land developments, unless you’re riding the marketing dollar of the estate builder and you’re getting in at level one on the estate not level eight when the thing is already sold out. And that’s typically when you’re buying into, through the multi-level, oh not multi-level marketers, they’re I don’t know what to call them really. But they’re negative gearing specialists and they go and cut bulk deals with the developers of the land or sometimes they develop themselves. And they cut a deal to get their margin with the developer and it’s usually at the end of the development stage and they can sit back and say oh this area has had such and such growth. And this is happening and that’s happening and all the rest of it. By the time you come on board, by the time these investors came on board, any growth that was in those suburbs is gone. As soon as the marketers pull out the price is dropped $40, $50,000. Because you can go and buy the land and you can build a house for $40- $50,000 cheaper. So of course the market levels out to the cost of production.

So they’ve got these properties that are now not worth what they paid for them. And they’re certainly not worth what they borrowed because not only, say it was a $400,000 house, well they might have borrowed $425, $430,000 because to pay for the insurance, the mortgage insurance if they had to, they were borrowing over 80%. And all the fees and the charges and the stamp duty and the fees to the marketers and all the rest of the stuff gets added in there. So they’ve borrowed, they might have paid $400,000 for it. They could have built it themselves if they’d known what to do for say $360,000 and maybe less. They’ve borrowed $450,000. So it’s like okay, there’s that much gone already and then the market folds from $400,000 down to say $360,00 which is where the market should have been resting and where they could have bought in. Now suddenly if they go to sell it now, they’re $70,000 behind the eight ball. You know $70,000 is a loss that they’re going to take less the commission so let’s call it $80,000. By the time, if they pull out of that property. And the thing is they’ve got two of them. So they’re stuffed. They’re absolutely stuffed. They can’t move forward. They’ve run out of equity to any serviceability to be able to go and buy something that will do the right thing by them. If they sell these two properties, they’re $70, $80,000 down the tube.

What do they do? Well this is very typical sad situation that I see all the time. And just like many other of my students, they said to me, oh I wish I’d met you 10 years ago. I wish I had a dollar for everybody who has ever said that to me. Because in that typically little story that I see over and over again, there are just so many mistakes. And the thing is, those mistakes can be easily overcome. They can be overcome with education. They can be overcome with knowledge. They can be overcome by having a support network around you to be able to throw questions into the ring and have them answered. To be able to really understand the process behind. To really get economic analysis and grid variance analysis and to really get a financial model and have a business plan that you’ve helped develop to run forward. Not a plan that makes fees for managed fund operators or marketers selling another development site.

You can see I’m pretty wound up this morning and I’m recording this at about 4:00 a.m. because I always get up early but this morning I seem to up exceptionally early and I thought well you know what, I’m going to down there and I’m going to talk about one of my pet hates and I’m going to talk about one of my biggest passions and the biggest loves of my life which of course is positive cash flow.

Now let me finish this story for you. I want to talk to you about what we actually did. And these are students of mine and they’ve come to me to have a bit of extra help of where to go to because they really were in a tough spot. So looking at their situation, the best thing for them to do was to actually cut their losses. The suburbs that these guys were in were in suburbs that weren’t going to move in value for at least two years. We’re going to see no movement in the price. So they either sat back and accepted their 20 odd grand negative cash flow for the next couple of years before the prices would even start to move. And my estimation of them picking up the extra $70-$80,000 that they were going to have to take as a loss if they sold these properties now would be for them to get up to what they actually owed on the properties. Probably another five years, maybe even seven years because of the suburbs that these guys have bought in. They were being sold these suburbs as being the be all and end all and the growth opportunity of the century. And even a mile level of economic understanding and training would have taught these guys that there’s no way in heck that that was ever going to happen. So they bit the bullet. They had to. Because copping a $20,000 loss on these two properties through for the next five years, that’s $100,000. And it’s not just $100,000 loss. What they’ve actually lost is the opportunity cost of being able to invest what equity they did have left into other properties into other markets with some decent due diligence and understanding behind them to really move forward and make things happen. So that’s what’s happening now. I think one of the properties is now sold and the other one is being sold.

Now step forward a little bit with those two properties sold with their incomes as they currently are, continuing to work in their jobs as they currently do. What they’re now able to do with those two properties sold is have enough equity left; they still had a little equity left even though they copped effectively a $140, $160,000 loss across the board on selling those two properties. They’ve now got the opportunity to go out and make that money somewhere else. They’ve got the opportunity to buy properties that are positively cash flowed. Wow, what a novel suggestion. Let’s go and buy something that actually puts money in your pocket rather than looses money. And these guys have gone to the areas that I’ve suggested. They got; they’ve actually got a contract on one property now knowing that they will be able to buy it because the bank has knowledge of the fact that the other property has got an unconditional contract on it. And so those two properties are out of their hair. They can start to breathe easily. And the properties that they’ve now contracted on to buy is positive cash flow $8,000 a year. And it’s in area that I believe will do very, very well. And they’re in a property that they can force the value on. So they can increase the value of the property by doing things to it. So they’ve got a triple whammy.

You know they’ve got a property that they can force the value of and make the property worth more. They’ve both in positions where they want to get stuck in and be active so that’s fabulous. They’ve got a property that is positively cash flowed $8,000 a year. And by the time they do what I’m suggesting they do to it over the next couple of years, it will turn into with current market about $40-$50,000 positive cash flow property. And they’re in an area that is increasing in value naturally. So just that one property, selling those two, biting the bullet, taking the loss, moving it into something that they can do something with has changed their lives. These guys are different people to the people I saw a few months back. They are positive. They can see things happening. They are in control and that’s a big thing.

We as humans have an in built capacity to blame. When things don’t go our way, one of the initial reactions that people tend to have is to blame something. To blame an external source. To blame a government. To blame the tax man. To blame the styles and to blame whatever. But in reality these guys made those decisions for themselves. They were the ones who signed the contracts. They were the ones who agreed to buy properties that were basically putting a nail in their coffin. But they are also the guys that decided this isn’t working. We’re going to go and seek some advice on something that might work. And we’re going to control it this time around. We’re not going to just pass it off to somebody else to make that happen for us. And that’s what I’m all about. I’ll teach you how to fish; I won’t give you fish. I will never sell you a property. That’s not what I do. It’s not something that I agree with for anybody in my situation where I’m telling you how to do things. I’m teaching you. I’m educating you. I think it would be fundamentally wrong and immoral for me to sell you a property. If I’m selling a property there’s a reason why I’m selling it. If I’m selling a property, you don’t want to buy what I’m selling I can tell you. So it’s something that you really need to be weary of.

These guys have a future. And the reality is that that in well probably 12 months, maybe 18 at the outside, the wife can retire. She can quit the job that she hates. Tell the boss that she hates to stick it. And she will have achieved her goal that she so desperately wanted some 10 odd years ago but went down the wrong path. Now I call negative gearing the dark side. Have you been on the dark side? And now she’s seen the light if you like. She has; oh they both have. But she is so enthused because she’s the one who’s going to give up work first. And what that means is does she retire and sit home and knit. No. Now that she has seen what really can be done and how quickly not only her life has turned around but everybody else’s in the program that she’s mates with and talks to and catches up with on a regular basis and all that kind of stuff. They’re doing similar things. They’re making things happen for themselves and it’s a totally different atmosphere when you’ve got that support network around you and you’ve got the ability to hang with people who are proactive, who are positive to her, who are out there kicking goals as opposed to sitting by the water fountain and winging. And it’s just; it’s a different energy level. It’s a different way of living. And these guys are now experiencing that and they’ve seen just how quickly things can turn around when you operate from that level.

When she does quit her job and say I’ve had enough. I don’t need this money anymore. She’ll be in a situation where she can now devote a year basically, the year that she was earning her $55,000. She will have replaced that income and she will now have that whole year to put towards making another $50,000 odd passive income the year after. Now that’s a great thing about passive income and it’s why it just makes such a difference from buying something that is positively cash flow to buying something that’s negative cash flow. Is that you make it once. You get that passive income happening once. And then next year it happens regardless. It’s not like when you go and you do a renovation or what I call a chunk deal where you go and force the value of the property and it doesn’t have to be a renovation. It can be a subdivision. It can be anything. But you get out there and you increase the value of your property. Now if you liquidate that property and sell it, you make a chunk of money and that’s great. And you wow you know, I just made $40,000. I made $50,000. I made whatever. And you might go and spend a bit on a reward and go on a holiday to Fiji or Europe or somewhere and pay down the mortgage with the rest of it and then you go wow that was really good. But now you come back from your holiday and you sit back and you go okay, now I’m going to make another $40, $50,000. Because you made the money. You paid the taxes. It’s gone. But when you make a passive income, you’ve still got the asset. You’ve still got the underlying asset that produces you the passive income year after year after year after year. It’s fabulous. And it continues on. It’s a legacy. It’s something that actually doesn’t even have to be sold. It’s something that you can pass down to your kids and your grandkids and you whatever there after; you’re descendants. Because it produces that income every year.

And there may be times when it’s advantageous to do things to the property to improve the property, to increase its density, to increase its yield, all sorts of things. They will be that over time. But as it sits there it’s something that you don’t have to go and make again. You’ve got it the first and then every year after that it produces at least that amount of money. So if you use that time the second year to go and produce that amount of money again, well from that year onward you’ve then got double the amount of income coming in.

Let’s just have a think about the reality of getting out there and making $1,000 a week passive income. Do you think that’s possible to do for something who’s got a little bit of equity maybe? Guys like these two that I was talking to with a little bit of equity go and do that in a year. Do you think that’s possible? Well you know it’s an interesting thought. Because I know from reality, from experience, from seeing my students doing it over and over again, that it’s not only possible but depending on your starting position, that can be possible inside three months. Now in contrast to these guys who got trapped into the negative gearing poverty cycle? I was talking to another one of my students who; I think in the last; I’m just trying to remember the timeframe now. But I think it was over the last say seven months, they have gone from a negative gearing depressed situation of not being able to have the serviceability to be able to go and buy a property, a home for themselves in Melbourne because they were negatively geared and it was just so depressing that the bank wouldn’t even lend them anymore money to go and buy a home that they wanted in Melbourne. So again they took similar kinds of decisions to get out there and use what equity they did have left to get out and buy positive cash flow properties.

And inside seven months they have accumulated over, I think it’s over $150,000 in passive income. Imagine that. Seven months, $150,000 passive income. Now of course now that they’re not negative gearing, they are now in a situation where the banks going to lend me any money they want to go and buy their principle place of residence in Melbourne. It’s an amazing turnaround once you start to make those decisions. Once you start to get yourself on a proper business planning track. To get yourself to a position where you know what you want number one. I mean I can’t tell you that. That’s something you got to come up with yourself. You’ve got to decide on what you want and where you want to go and what kind of position you want to be in and what space of time and those sorts of things. But after that it’s education. It’s applying that education. It’s having that support team around you. It’s having people around you who say don’t go and buy it in your own name. Put it into a protected structure so at least you don’t get sued. Don’t go and cross securitize. No, don’t go to that bank. Go to this bank. This is how you set it up. Having those lawyers and the accountants and the financial strategists who actually know what they’re talking about and they’re not making money out of selling you some house and land package in the burbs that is $40-$50,000 under value. And it’s the same as every other house in that burb.

I am being a little bit cynical this morning aren’t I? But the fact is, it’s something that I have seen ruin so many people’s lives over my career. And I go back to when negative gearing and depreciation and all of that kind of stuff really became vogue in the mid 80s. And I was out practicing believe it or not in the mid 80s. I might have only been newly practicing but I was out practicing in accounting, in the mid 80s. And it was the thing to do and I’ve been a financial, certified financial planner in the past. And I’ve owned my; my senior partner owned; accountants who practiced and I’ve been an advisor to some of the wealthiest people in Australia and I have had the words come out of my mouth, negative gearing is the thing to do all those years ago. And it’s not. It wasn’t until I went through a little bit of pain myself in financial planning I’m talking about. Where I had to start all over again from divorce and a business partner ripping off one of my, well two of my clients for $555,000, picture $400,000. And I made the decision to repay that money myself.

There are tough times and it really makes you sit down and think okay well what’s going to work. I’m doing everything right. I’ve got my accountants practice under control. I’ve got my money management is good as it’s ever going to get. I’m doing everything that everybody has ever told me to do. Why aren’t I getting ahead? You know I’m picture perfect textbook. I’m perfect money manager, all this kind of stuff. Why the hell can’t I get ahead? Why can I not see any other road than 25 years down the track I might be able to retire when I’ve got small kids to look after on my own? How the heck am I going to do that? And it wasn’t until I went through those thought processes myself and actually felt the pain of that. That my logical head came even go right. Obviously all this stuff that I’ve been taught for the last 20 odd years isn’t working. Negative gearing hurts. I can’t afford to buy negative cash flow property. I can’t afford to give up the bread and the milk and everything else that I’m putting onto the table now for the kids. I can’t work any harder. I don’t have anymore hours in the day. So I can’t buy a negative cash flowed property that everybody else says that that’s the way to get ahead. So I thought if that’s not the way to get ahead well what is? And when I went through that pain myself and I thought okay well what do I do? It was then and this was long before positive cash flow was ever talked about. It was then that I thought you know, maybe I could find a property that isn’t, doesn’t actually cost me anything. Maybe I can get into that. And of course that led to a whole raft of understanding and mathematics and due diligence and a whole voyage of discovery that changed my life. And once I, and fear, conquering that fear to get to there and take the first move. Particularly like for these guys I was talking about before. They had already taken that move. They’d gone over that fear to take the first step and to buy that first property and made a mistake. So not only did they have to get over the fear of taking action, they had to get over the fear of making the wrong decision again. And that’s a hard call. So for me it was, it took me six months. It took me six months to actually buy a property. From the time I decided on my strategy and said rot. This is what I’m going to go and do. I can make this work. I’ve done all the modeling. I’ve done all the financial analysis. I’ve spoken to everybody who tells me I’m crazy because why would I want to do that. I’m only going to have to pay tax. Why buy a property that’s positively cash flowed? You’re going to have to pay tax. Good God. Forget the tax. Make the money fist. Pay the taxes; reduce the taxes where you can. But make the money first. Why are on purpose go out there and lose a dollar so you can save 30 cents?

So for me from the day I made that decision it did take six months before I could, I got over my own fear to get in and buy that first property. And the first property was positively cash flowed. On top of that, I actually had to do it without any money which is an interesting exercise in itself. But that’s for another day, not for today.

I really just wanted to have a little chat to you about this negative gearing process and how it really is, it’s tax driven poverty. That’s what it is, tax driven poverty. And it’s keeping a lot of Australians in jobs they don’t like. It’s causing depression. It’s causing marriage break ups. It’s one of the major causes of financial stress in this country. And it’s still astounds me that there are people out there promoting negative gearing and saying oh you know when the property goes up you just go and use the equity and go and buy another negative cash flow and you end up with one, two, three, four and you might be $50, $60,000 negative cash flow. And they say oh don’t worry about it. You just go back to the bank and borrow against it to live on. Live off your equity. Even if the thing does go up in value. Living off the equity is the most dangerous strategy that you can take on board.

It reminds me of another student of mine that, oh she came to me about two years ago. No it wouldn’t have been that long. It would have been about a year, a year and a half ago. And she told me her story. And she followed that model. She was working with one of these groups that sold negative cash flowed properties and they’re all brand new houses and land packages in the burbs. And she’d ridden a growth wave where the properties had gone up in value. They counted the $40, $50,000 that she’d bought them over market value and then moved about that. But then of course the market slowed. The GFC came along and money became tight and she couldn’t reborrow against her equity. She couldn’t service the loan. She had 18 of these properties. And to an outsider, I think wow she’s doing really well. Look at the car she drives. She’s got 18 properties. Wow. Eighteen properties and every single one of them was negative cash flowed. Imagine paying the mortgage on that. Where you’re $182,000 a year negative cash flow. And the only way that she was paying the mortgages was that she had set up lines of credit against the equity because they had gone up in value. But as soon as the market turns, the banks aren’t going to lend her any money. The equity gets chewed up very, very quickly. I’m very sad to say but this lady went bankrupt. Because she followed that model. That model doesn’t work. That model works for a limited time in a high growth market. But it doesn’t work in any other market, any other time. So why put yourself in such high risk scenario to deal with that when you could go out and have an easy life. I call it the easy road Charlie road. Take the easy road. Take the easy path. You don’t have to take the hard path. And negative gearing is certainly a hard path and it’s a rocky road that for many people leads to destruction, depression and all sorts of horrible things.

So guys I guess that’s enough of my rambling this morning. I do hope you heed my comments. It’s a very serious comment about negative gearing. It is something that in very limited circumstances it has its place. But it is over used and it is crippling the general public. The investing public of Australia is being crippled by negative gearing. And this last period of the GFC and the slowing of the economy and the tightening of the monetary system with the banks and all those sort of things has really emphasized again just how right I am. And that you, this is not the road to take. There are better roads to take and the way to find the right path for yourself is via education. Get out there, get educated, get knowledgeable, know how to do the calculations. Know how to do due diligence. Know how to do your variance analysis. Know how to put that business model together. Know how about finance and structure and asset protection and tax and legal issues. Really get yourself in a secure educated position.

I had to laugh the other day. One of my students stood up and she was talking about just how far she had come. And this is a lady who in her words is, what does she call herself? She’s not good with numbers. I can’t remember what she calls herself. She’s got a name for the fact that she doesn’t like numbers and as she takes time to do the math and the calculations and things like that. And she stood up and she said that she was talking to her brother. And this lady has been a student of mine for probably about four years. And she had been talking to her brother who had done no financial education at all. And she was so proud of herself because she always looked up to her brother and she always considered him to be so much smarter than she was. And when she was talking to her brother about investing and they were going to go and do some stuff together, she was shocked, horrified and amazed at how much she knew in comparison to her brother who she had always put up on a pedestal as being so much better than her mathematically and all those sort of things. And she just knew so much more and she stood up and she was talking to a group 50 off people. And she said that she wanted to thank me about taking her on that journey. And for everybody in the room to acknowledge just how far they had come. And just how much of a difference that education had made, every facet of their lives. And it’s true. Education is something that I believe very, very strongly in and it is the path to freedom, financial freedom. To be able to live the life you want to live. To be able to do the things you want to do. To be able to be in a position where you’re in control. And if you want to go to the beach today, you go to the beach. If you want to go to work, you go to work. It’s the ability to be able to be proactive and really control your own destiny.

So on that thought, I’m going to leave you with that this morning. Think about what I’ve said and really step up to the plate. Guys, if you’ve been to some of my ultimate stuff before and that sort of thing, come back. Come back. Get re-enthused. There’s places around Australia that I go through that I talk about that I believe will double in value over the next three to five years. There are places that are yielding positive cash flow that will replace your income in very short spaces of time. It’s just a matter of getting that knowledge together to work out the price points and the logic and the business plan behind your personal situation and what you have to do to make that happen.

So guys, thanks heaps for listening to me this morning and I’ll be back again to talk to you very soon. Bye for now.