Is negative gearing bad? Today I want to discuss why negative gearing is a bad investment strategy. I want to give five reasons as to why I think it is a bad investment strategy.
I just want to say from the outset that you can make money with negative gearing in Australia. If you couldn’t make money with negative gearing then no one would be doing it, but there are better investment strategies out there.
I don’t think you should just stick to negative gearing. I think you should open your eyes. I think you should look around, and find out what else is out there. Take the time to invest properly rather than just buying the first property you see or the first property you can afford to buy.
Why is negative gearing a bad investment strategy?
Here are the 5 reasons why negative gearing can be a bad investment strategy
Disclaimer: This should not be taken as investment advice. Everyone is different and different strategies work for different people. This means that even negative gearing can be effective for some investors. So take this as general information, not specific advice.
1. It Eats Your Cash Flow
It eats your cash flow, tying you to your job. With a negatively geared property you are paying money every single month into that property, because the rental income that you’re receiving does not cover all of your expenses. Every single month you’re putting your hard earned money into that property, money that is almost certainly coming from your 9:00 to 5:00 job.
This means that if you had to quit your job or if you got fired, that property would still need that money coming in to pay for it. It actually ties you to your job, holds you in your job, because you can’t quit your job. You have to pay for your so called investment.
2. In Order To Make Money You Have To Sell Your Property
In order to make money, you have to sell your property, giving up future growth. With negative gearing the idea is you lose money on a monthly basis, but the property will go up in value. You can then sell it, and you can then realize that value. Unfortunately, when you sell the property you will lose the future gains that that will have.
Let’s say you hold it for 10 years. You sell it, and you make a profit of $200,000. If you could hold that property for another 10 years, you might make an extra $400,000. If you have to sell it to realize that first $200,000 then you’re missing out on all of this future growth.
3. Or You Have To Borrow Against Equity Making You Even More Negatively Geared
This ties in with reason number two, or you have to borrow against it and be even more negatively geared.
Say you don’t want to sell your property but you want to access some of the capital growth that has occurred. You’re going to have to borrow against that equity from the banks, which is not a bad thing. It can be a great way to leverage into more properties. But if you’re borrowing on a negatively geared property, your biggest expense, which is likely to be your mortgage, is going to go up in value each month.
This means that it’s going to eat your cash flow even more and tie you to your job even more. Borrowing against it makes you even more negatively geared, which isn’t exactly a positive thing.
4. You Are Limited In The Number Of Investments You Can Buy
You’re very limited in the number of investments you can buy.
If you’re positively gearing your properties, which means you’re making money every single month because the rental income is greater than the expenses, you can buy as many properties as you can afford, because each one is going to actually increase your cash flow. You do not have to pay for these properties.
But if you’re investing in negatively geared properties then you are limited in the number of properties you can afford to own. Let’s say a property costs you $100 a month to own. You might be able to own a few of those, but once you get past 5 or 10 or whatever it might be, you’re going to run out of money to fund those properties.
If I’m paying $100 a month for every property I own, if I own 10, I’m paying $1,000 a month.
Then my money gets sucked up pretty quickly, because I also need money to pay for food, to pay for my children, to pay for clothing, to pay for my own housing, and all of these things. $100 a month is quite a conservative number.
You’re very limited in the number of investments you can buy, which means your capital gains and your growth is going to be limited. If you could buy 100 properties, then you could obviously get capital gains growth and rental growth on 100 properties instead of just 3 or 4.
5. If The Market Goes Down or Stays Stagnant You Lose Money
If the market goes down, or even if it’s just stagnant and not growing, you are going to have no way of making money.
Negative gearing relies almost 100 percent on the market increasing in value, and your property increasing in value, in order for you to make money. If it goes down in value, you can’t sell it. You can’t access equity, so you’re just paying money and getting absolutely nothing in return.
If the market’s stable, you can’t access equity. If you were to sell it, you’re going to have to pay things like your real estate agent fees. You’re actually going to go backwards because of those extra fees that are on top of the property if you sell it and it hasn’t gone up in value.
There are the five reasons why I think negative gearing is a bad investment strategy, and why I try and avoid negative gearing as much as possible. I want to grow my income. I want to expand my cash flow, and I want my investments and my business to fund my lifestyle, not to take away from them.
If you want more information, why not try our free Property Master class? It’s a five audio lesson series. Just go to here and pop in your email address, and you’ll get direct access to that immediately.