Does Negative Gearing Guarantee Capital Growth?
There is this belief that negative geared properties grow while positive cashflow properties don’t. But does negative gearing guarantee capital growth?
There’s this belief out there in the world of property that negative geared properties grow in value or provide you with capital gains. Whereas positive cash flow properties don’t grow in value and don’t provide you with capital gains. So when it comes to investing, you either need to choose negative geared properties or you need to choose positive cash flow properties and you can’t have the best of both worlds. So today, in this episode, I want to talk about whether or not negative geared properties are guaranteed to grow in value.
Hey, I’m Ryan from onproperty.com.au, helping you find positive cash flow property. I’ve just moved house, so if you’re watching the video, you’ll see a bunch of boxes beside me. So, sorry for that, but I didn’t have time to unpack and wanted to get straight into it and talk to you guys.
This thought comes out of an email conversation I’ve been having with one of the followers of On Property who’s interested in a whole bunch of situations, but seems to have the belief that they can either invest in negative geared properties in order to get capital growth or they can invest in positive cash flow properties, but they’ll need to forego the capital growth.
I just want to tackle this topic and get you guys thinking about this as well. Do negative geared properties guarantee that you’re going to get capital growth? Because a lot of people go to seminars. A lot of people read investment magazines or investment books and they’ll come out of it thinking the best way to invest in property is to purchase negative geared property that’s going to grow in value. But for some reason, in amongst that, they get the belief that says, “If I buy negative geared property, it’s going to grow in value.” which isn’t exactly true. And the easiest way to debunk this myth is to just say, “Do you know of an example of a negative geared property that hasn’t grown in value?” and I could give you a myriad of examples.
Everywhere from my friend who purchased a new build property that 5 years later, still worth less than what he paid for it and was negative geared the majority of that time, to a whole bunch of investments that are being sold at the moment off the plan that are negative geared and probably are overpriced and won’t grow in value, to my parents who purchased a negative geared unit in Cronulla in Sydney; which is within a capital city and they owned it – I can’t remember how many years they owned it, but it didn’t grow in value by the time they sold it. I can think of many examples in my life where I’ve seen that negative geared properties don’t grow in value.
We also want to look at the other side of the coin, is that the belief that positive cash flow properties don’t grow in value. Again, I’ve seen many examples of positive cash flow properties that have grown in value. I go out, I find a new positive cash flow property every single day. And because I do this so often, sometimes you see the same properties come around or you see the same areas and you see how much they’ve gone up in value. So, I can say, with certainty, that there are properties out there that have grown in value.
Even, I think it was probably like a year or 18 months ago, that I listed a positive cash flow property in Western Sydney that had a granny flat attached to it. And we all know what has happened to the Sydney market in the last 1-2 years and how much that market has grown. So if you have purchased that property, which was positive cash flow at the time, then you would have got the Sydney boom and, obviously, grown in value.
So we can see that on both ends of the spectrum that it’s not an absolute. Buying a negative geared property isn’t going to guarantee you capital growth and buying a positive cash flow property doesn’t mean you’re going to not get any capital growth. So where exactly does this belief come from? Well, it may come from property marketers – people who are presenting courses to you or trying to sell investment properties can obviously skew things one way or another.
Or maybe it’s from the results that people have seen in terms of capital cities tending to outperform regional areas and the majority of properties in capital cities are negatively geared. So there’s a lot of different ways that people have come about this belief, but I have never seen statistically viable information that has shown me that negative geared properties will always grow in value and positive geared properties don’t grow in value.
So the fact of the matter is, when you look at the Australian property market, the majority of the properties on the market – I would say in excess of 90% of the properties on market – are going to be negatively geared. Now, I just made up that 90% figure. I’m not 100% sure, but I look for them, I find them here and there. There are a lot out there. But compared to the amount of properties on the market as a total, it’s a small percentage that have the high enough rental yield to be positive cash flow.
So when you look at the Australian market, you have way more choice if you go down the negative geared route. If you want positive geared property, then you need a narrow focus and you need specific properties with high enough rental yields to generate a positive cash flow. So this limits your playing field significantly and there’s only a select portion of properties in Australia that you can invest in.
However, if you’re investing in negative geared properties, then you’ve got the majority of the market to look into. Within that market, there’s a lot of great properties that are likely to grow in value and there’s a lot dud properties in dud areas that aren’t going to grow in value or that are going to go backwards in value, but you have access to almost the entire market. And so, that’s where I think this belief comes in.
Because you have access to almost the entire market, you could potentially pick the cream of the crop of the best property in the best area. Because you don’t care about rental yield, you could get the best capital growth property. Whereas if you’re investing in positive cash flow property, because you’ve narrowed your field to only properties with a certain amount of rental yield, then the chances of you finding the absolute best property that’s going to grow in value is smaller.
So, that’s where I think the belief comes from, is that negative geared people have access to the entire market so they can choose the best of the best. Whereas, positive cash flow people have access to a limited amount of the market so they don’t have as much choice or as much chance of getting a positive cash flow property that also grows in value.
However, this requires something extremely important that most people don’t talk about. And that is that you need to do your research into an area. You need to understand exactly what is it about that area that is likely to grow in value over time. If we just say, as a blanket statement, “Capital cities grow faster than regional centers” then, yeah, that’s going to be true in a lot of cases, but there’s definitely regional centers that grow faster than their capital city counterparts.
So, that’s not exactly a true statement, it’s just a general observation and it’s like a lot of the generalizations we have about people of different races or whatever it may be. It may be true for a portion of that population, but it’s not true for everyone and it’s a racist thing so we wouldn’t say it. It’s the same for the property market. We make these big generalizations that aren’t true for each specific example.
So when it comes to negative geared properties, they don’t always generate capital gains and there are many cases of people buying negative geared properties that have gone backwards in value. So, what you do need to do is you need to research your area and you need to understand the growth metrics of that area to understand whether or not that area is likely to grow.
The best thing you can look at, off the bat, is just go to dsrdata.com.au and you can see the demand-supply ratio for the area. 50% is the theoretical matching of demand and supply. Anything over 50% means that there’s more demand in the area than there is supply and this likely leads to increases in value. You can also sign up for a free account at DSR Data, you can get a lot more information and trends.
Things like vacancy rates for the area, vendor discounts for the area, auction clearance rates, what percentage of stock is on the market, the average days it takes to sell a property. You can track all of these different things through DSR Data. So if you’re looking at researching an area, that is a great place to start in terms of finding out about the area. There’s a whole lot of other factors that you may want to look into as well, but it’s very difficult to research an area and to understand is actually going to grow? Is this going to be the best performing area?
What I would say to counteract the belief that positive cash flow properties never grow in value is that you need to find positive cash flow property, but don’t just invest in any old positive cash flow property. You need to do your research into the area. You need to understand whether or not that area is likely to grow in value and I would advise anyone if they’re going to invest in positive cash flow property to do their area research first because you want to invest in a positive cash flow property that’s still likely to grow in value. Because if you’re just going to choose any old positive cash flow property, then, yeah, you may not get capital growth. But if you do your research into an area, you will find a great area that’s got good demand and good things pointing to it that it’s going to grow. Then, you can get the best of both world.
Look, if you want to invest in negative gearing and you’ve got the whole market to look at, then do your research and find the absolute best suburb that you can afford that you believe is going to grow by the most amount in the future that’s going to help you achieve your goal. I truly believe that both negative geared and positive geared properties can either grow in value or decline in value or stagnate in value and what it really comes down to is the area research that we do on these properties. So don’t get caught believing that if you invest in a negative geared property, it’s going to grow in value or that if you want to invest in positive cash flow properties that they’re never going to grow in value. You need to do your research.
You need to understand the area you’re investing into, the property you’re buying, is it likely to grow? Is the demand there? And try and predict what the future is. Which we can never do with 100% certainty, but by looking at a lot of different statistics, we can get a much better idea. We can lower our risk of the area stagnating or declining and we can increase our chances of investing into a growing area.
So if you have that belief, I would advise you to check yourself before you wreck yourself and go out there and do your research. If you want help doing research and DSR Data isn’t enough for you – that’s a great free tool – you can check out my course on area research. Just go to onproperty.com.au/research and there, I provide you with a checklist of things that you can go through and also explain how to find out all the different statistics about an area and how to make sense of all that data so that you can make an educated decision. Again, that’s onproperty.com.au/research.
I hope that this episode has helped you debunk the myth that negative geared properties are always going to grow and positive cash flow properties are never going to grow and you can now go in with your eyes open. Do your own education and understand an area based on the research that you’ve done. Not based on some “idea” that people have taught you that negative geared properties are going to grow because they may not.
And you may get a negative geared property that also declines and then you got the worst of the worst. Or, if you take your time, do your research, you may get a neutral or a positive geared property that also grows and you’re going to be a very happy person. Or you may get a negative geared property that grows substantially and you’ll be an extremely happy person. So take the time, do your research and don’t just believe these blanket statements that say negative geared properties always grow in value or capital cities always grow more than regional centers because at the base of them, it’s a general idea, but really, they’re not 100% true and so, you probably shouldn’t base your entire investment career off these blanket statements.
I wish you the best in your property investment career and until next time, stay positive.
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