Why Negative Gearing Is A Mistaken Real Estate Investment Strategy

When you buy a property as an investment, you will have crunched the numbers to see how much you will earn in rent, pay in loan repayments and also other liabilities like repairs and maintenance. At the end of all that, the real estate you buy as an investment will either be positively, negatively, or neutrally geared. If the property is positively geared, then it earns more than it costs, and if it is negatively geared then it costs more than it earns – and neutrally geared means that costs and income are about the same.

In some countries there is a real mindset that negative gearing is a good thing. This is largely due to the structure of tax regimes, which in countries like Australia for example means that owners of investment properties which are neutrally geared are able to claim the costs of having the property as a deduction on their personal taxation liability. Running a real estate investment like this is even encouraged by mainstream wealth consultants and accountants- go figure. However it is heartening that some in the industry are starting to question the value of negative gearing as an investment strategy.

Running a real estate investment property at a loss is bad for everyone

Really, when you buy an investment property which is negatively geared, you are hoping that its value will go up – and that the rise in capital will be enough to offset the losses you incur in the meantime. This is a bad way to do business (and investing in real estate is a business).

A much better way to do business is by making sure that your investment property has positive cashflow – that it earns more than it costs. That way it pays for itself and you are not relying on any capital growth to create a future windfall. It just makes sense.

So having a negatively geared investment property is bad for you because it costs you money – it is also bad for the community. What having tax breaks for negatively geared properties does is create a bubble – a false inflation of prices where everyone fools themselves about the true value of real estate in the economy and skews interpretations of supply and demand.

By encouraging speculation in property, negative gearing supported by government also inflates house prices, making affordable home ownership something that is harder for families to attain.

So before you go and throw your money away on some property investment gamble – reducing your taxable income because you lose money on buying a piece of real estate at grossly inflated prices – think carefully. Look into positive cashflow investment properties – they are everywhere, and won’t require an army of accountants and a lucky leprechaun to turn a profit.

 

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