Her Take On Negative Gearing
On today’s episode,
Bernadette is going to share with us how negative gearing works and what you should know about it when you are thinking of investing in property to increase your income.
From Bernadette’s and Stephen’s own war story when they have been on the bad end of the deal with so called property “gurus” and how they have endured by using their due diligence and coming up with the decision to stand their ground and not go through with the sale.
Now Bernadette wants to share her knowledge to all fellow renovators to not get into the trap of not being prepared when you’re buying a property to invest your money.
Listen to Episode 18: Her Take On Negative Gearing
Podcast: Download (Duration: 27:39 — 50.62 MB)
- Updates on her 2 renovation projects - Wynnum Project and The Factory Floor
- What does negative gearing mean in property investment?
- How and When negative gearing works
- The king of negative gearing
- Negative gearing is losing money so there needs to be a bigger end game
- How many Australians are getting into negatively geared properties inadvertently
- Bernadette and Stephen's war story and their lucky escape
- What are the issues with House and Land properties?
- Important points to provide further clarity on negative gearing
01:35 - Negative gearing
02:28 - What's happening in my projects
05:55 - The Wynnum project
07:12 - Due diligence skills
08:05 - Applications for negative gearing
09:47 - Tax deduction for the loss
10:58 - Buying property
11:05 - The King of negative gearing
14:35 - Selling off the plan units, house and land packages
16:47 - Someone who could help us
18:28 - You need some checks and balances
22:45 - A cooling off letter
23:30 - A very cheap lesson to learn
24:24 - Very young developments
25:15 - The greed factor
25:48 - Hold it minimum 10 years preferably 30 years
26:45 - A company providing education
27:15 - You need to get a bit savvy about it
Get "Episode 18: Her Take On Negative Gearing" Show Notes and Transcript
“And the other problem that I see with it is that there are so many so called gurus I should say. Property sales companies masquerading as education companies who are selling properties to people and using the supposed tax saving as a marketing tool. And the properties that they're selling are just not right for the people that they're selling them to."
Well hello! It's Bernadette back with another episode of She Renovates. And today we're going to be sharing the She Renovates take on negative gearing.
So negative gearing, it's been in the spotlight recently because the shadow government or the opposition was campaigning to abolish it. But thankfully that's not going to happen in the foreseeable future. I say thankfully because there are a lot of people with negatively geared properties and contrary to popular belief they're not real estate moguls by any stretch of the imagination. They are the battlers. The majority of them are anyhow and I will share an infographic in our show notes, it was shared by the ABC fact checking department that gives you a breakdown of the sectors of the community that do have negatively geared properties.
What’s Happening In My Projects
Before I get into that I wanted to just share what's going on in my life in terms of renovating.
And so I've got a couple of projects on the go and one of them is very close to home.
The Factory Floor
We have the ground floor of our home it’s a separate dwelling. Over the years have had that rented on long term rent and short term rent. We've had children living in it and when the last child left we decided to investigate the potential for it in terms of Airbnb. And I discovered that it has the potential of around about $60K per annum on Airbnb.
I decided to give it a bit of a makeover because it was looking a bit tired and to get it back onto Airbnb because it forms part of my retirement plan. I've been doing a renovation and part of that renovation has been a few weekend projects which is the part of renovating that I absolutely love. Injecting a little bit of personality into the property.
Now it's hard to do this when you're buying, renovating and selling because personality polarises your market. So you want to keep it pretty broad but in Airbnb it's perfect because it makes the property talk-about-able. And so I have created a theme for this particular property and because it's a warehouse conversion that was converted from an old factory into residential. I've decided to call this particular listing The Factory Floor and I'm going with a bit of a pseudo industrial theme.
we'd finish but we hadn't sold. So they filmed the whole lot of that and didn't take it to air.
I've got three weekend projects:
- The first one was that I created a bed head, I shouldn't say I did, it was my idea and my darling husband, Stephen executed it and that is made from some up cycle quite ornate doors and it also forms a walk in wardrobe so you walk arm round behind and the wardrobe is behind and so that's installed and we've chalked painted it and we're about to distress that and that will be done.
- The next project was upcycled an old blackboard, so got a large framed blackboard and refinished it with blackboard paint and then had a go at my first attempt at chalkboard art and it was surprisingly effective.
- The third project which is my signature upcycled industrial chandelier. I've got all the components assembled. So I had to have a steel fabricated ring made with some holes in it and I've bought a spider fitting that forms the basis of the chandelier.
Obviously I don't do DIY electrical. We get our electrician to actually wire it up but I basically assemble it and just bring him in to do the electrical work and install it and we'll be sharing some photos of these projects over on our Instagram feed in the coming week. So watch out for those.
The other project that I have going is my reno in Wynnum which I'm doing as a joint venture with one of our students, one of our Wonderwomen and that is about 85% done. So it was a splitter block which we've realigned the boundary and so now are up to the stage where we're able to register the vacant block as a separate title. And in terms of the reno it's pretty well done.
We've just got to organize a carport and driveway which requires a little bit of work with our town planner. And then we'll be able to complete, do the last bits of that renovation and get that to market. Thankfully the market is very healthy in that particular suburb. So yes. In the next couple of months we should have a result on that. And of course when I have completed that reno I've promised our Queensland followers that I'll invite you in to check it out.
And yeah I'm looking forward to meeting you.
So now let's get in to negative gearing. One thing I'm going to do in this podcast is to share an experience that Stephen and I had quite a few years ago where we went very close to making the biggest mistake of our property journey. And thankfully my due diligence skills saved us. But since then I have met a lot of people who weren't so lucky. And so that's why I feel this episode is necessary because I think people just don't understand what's going on. And there are a lot of sharks out there who will prey on you if you're not quite savvy about this. And it's pretty simple.
How & When Negative Gearing Works
Firstly, I'm going to talk about the applications for negative gearing, why you would do it. And then I'll share my story and then I will share why you wouldn't do it. I can tell you I think there are more reasons to not negative gear than there are to go with it but I'll get started. So let's get back to basics. The whole concept of negative gearing is that the strategy works when you've got the ideal conditions. It's like any strategy, you've got to get all the touch points right. And so it's based on the assumption that property increases exponentially in value over time. So the old adage that property doubles every 10 years it doesn't double every 10 years in every area. But there are some core areas where historically that's what's happened. The first thing you need to do if you're planning to go this way is to make sure that you purchase in an area that is hopefully, there are no guarantees but double over a 10 year period.
The theory is that say you own a home in a good suburb. And I always liked to think of good middle class suburbs and you buy your neighbour's property or buy a property in the same street or in the same area an equivalent property, use some equity in your own home to actually purchase it. And then just hold it, rent it out whatever you do to help you to cover the payments but then hold it for 10, 20, 30 years. So over that period of time the capital growth will diminish the loss that you make in holding it. Over that time you will find that the rent doesn't cover the payments, so you're going to have to top it up. But in 20 or 30 years time or even 10 years time that loss should pale into insignificance. And the negative gearing part of it is that you will be able to claim a tax deduction for the loss that you make against your weekly or monthly salary and used in the right way. It is very effective.
I just look back on the first home that Stephen and I bought together was 35 or nearly 35 years ago. And we paid about $80K for it and now it would have to be worth at least 10 times that. If we had bought our neighbours and just sat on that and did nothing else, we would have a property that is worth 10 times what we had paid for it. And the cost of holding it for that period of time would be probably insignificant.
The other scenario where I think negative gearing works is when you are buying a property that has a higher and better use. So you might buy a house on a large block that in the future you could develop. You'll probably pay significantly more for the house than if it was on a standard block. But the potential for profit when you do develop it once again makes the loss that you've made on the way pale into insignificance.
The King Of Negative Gearing
There are 2 scenarios where negative gearing does all things being equal work. If it's a strategy that you're interested in, the person to follow would be Chris Gray. He is the king of negative gearing. He's built a now $16 M portfolio based on negative gearing. And so he would be the person to follow. The problem with it is that it's used indiscriminately and a lot of people buy negatively geared properties because they think they're going to get all the tax back that they pay. And the reality is that you have to make a loss to negatively gear and depending on your tax bracket the amount you get back varies.
Negative Gearing Is Losing Money So There Needs To Be A Bigger End Game
So even if you're in the highest tax bracket 46 cents in the dollar you'll get the 46 cents of what you've paid in lost back but you've still got to pay the other 54 cents. Now that's reduced certainly in the early years quite significantly by depreciation in the first 5 years. But the reality is you are still losing money. I heard it said somewhere that negatively gearing is or negative gearing is a socially acceptable way of saying that I'm losing money and it's absolutely true. You are still losing money. So there has to be a bigger end game to make negative gearing worthwhile.
Many Australians Are Getting Into Negatively Geared Properties Inadvertently
And the other problem that I see with it is that there are so many so called “gurus” education companies I should say, property sales companies masquerading as education companies who are selling properties to people sort of using the supposed tax saving as a marketing tool. And the properties that they're selling are just not right for the people that they're selling them to.
And as I said I was going to give you an example of this and I will in a minute. But a lot of these companies are selling off the plan units and house and land packages and there is a huge issue with those for 2 reasons. One there is an endless supply of them because the developers can just go on punching out more house and lands and more units. And the second reason is because they have astronomical commissions.
So hence the reason why these so-called gurus act are quite keen to sell them because they're lining their pockets at an incredible rate and yet they will do this under the guise of looking after your interests. But I can tell you it is not your interests that they are looking after.
Our War Story: A Lucky Escape
Which brings me to the story that I was going to tell you. So some years ago Stephen and I sold a property and we wanted to reinvest the money in different states and do it quite quickly because at the time we were very time poor. Stephen was working really long hours and I was running a business and so we were looking for someone who could help us with that. And we came across a company who was promoted by one of my Mentor and someone that I really respect. And so we had a meeting with them and they recommended that we buy 8 properties house and land.
And at this stage we hadn't formed a view on negative gearing. In fact it wasn't promoted to us as negative gearing at the time but we knew it was. And I just thought that's ridiculous. There's no way we're buying 8 properties from an untested sort of advisor with an untested strategy, it's just not happening. So we said to them we will look at 4 and make a decision about whether we're going to buy any or all of them. So we were invited back to their office for a second meeting which we did and were presented with 4 contracts. Incidentally those contracts each of them was like a copy of war and peace. They were massive and we had decided that we wanted to use our own legal representation because our one stop shop they covered everything. We didn't want that because I just think that that creates extra risk. You need some checks and balances. And also that we would go and do our own due diligence despite the fact that they reassured us that their due diligence was second to none and that they are working now looking after our interests. And then they said that you probably should sign the contracts now but we won't execute them until you give us the okay.
Now something happened inside that office because there is no way in a month of Sundays that we would ever sign a contract that we had not read. But for some reason we thought that was an okay idea. It was hard for us to get in there together. And that was the reasoning that they gave. But even so it still to this day amazes me that we did that but we did and so we went away. And then when I got home I thought, Oh my god! What have I done? Like that was crazy. And so I rang them and said I want to remind you that you are not to execute those contracts until we've given you the say so. And also you need to email them to us so we can read them ourselves and so then we can send them to our own solicitor to have them reviewed.
So a few days after that I jumped on a plane and went to Melbourne. There was one in Victoria, one in Western Australia, one in Queensland and one in northern New South Wales. And so I went to Melbourne to look at the first property and when I got there it was pretty much just the paddock. So they’ve started to make roads but it was like very very early stages. And when I looked around the suburb I realised that for the money that they were asking us to spend we could do a much better buys there and it just wasn't a good deal. So that evening I rang Stephen and said it's not a goer. It's not a good deal. And he said, Oh well, the first contract has arrived and it's been executed. So they basically were trying to railroad us into buying those properties $2 M worth of property. And so I was slightly panicked at that stage.
What we did was we wrote a cooling off letter and sent it by registered mail to their solicitor to make sure it got there on time. Keep in mind we still hadn't received the email version of the of the contract. And over the next few days the same thing happened with the other 3 contracts. So they all turned up. They had all been executed and we were at that point in a conditional contract. But had we not acted to cool off we would have ended up in an unconditional contract which was a very undesirable situation to be in when we didn't want the properties. So of course they had just crossed the line incredibly. But we were reluctant to cool off because when you cool off it means you lose your holding deposit. However, I was able to campaign to get that returned because clearly there was some deal between them and the developer.
But they argued with us for weeks and weeks trying to get us to not withdraw from the arrangement. But eventually we did and recovered the deposits. And then shortly after that I got a letter from the solicitor with a bill for each of the contracts that they had executed. And I rang the company and said you know we had explicitly said that we wanted to use our own legal representation. And they said to us you remember that contract that you signed that day in it you gave us permission to use our solicitor. So there you go. I figured that we had. That was a very cheap lesson to learn because the alternative was unthinkable we could have been in the in unconditional contracts with $2 M worth of property. So it was a lucky escape.
But since then I have met people that were duped by this same company and now own property in those same developments that we were offered deals and they are still not worth what they paid. So what I think is wrong with these scenarios is firstly most people that go into them have no idea what they're doing and they're relying on these sharks to advise them. And it just doesn't work.
Issues With House And Land Properties
Some of the issues with these particular deals are that the properties are in very young developments. The development hasn't matured. And so it takes them a long time to get up to speed and to start growing in value. If you're in your 20’s or even 30’s and you buy a property like that it's fine because almost any property over 30 years will double, triple or even quadruple in value. But if you are in your 50’s and you're looking at buying a house on land you just do not have the time for it to appreciate sufficiently to make a difference to your financial future. In fact it's going to be a noose around your neck for at least a decade.
The second problem that I see with them is that they're overpriced to the tune of the fat commissions. So not only do you have to recover from the fact that they're young, you also have to recover from the fact that they're overpriced. I know this for a fact. We actually, in our community, we have a buyer's agent who or a real estate agent who has actually shared with me the actual figures that they pay people who sell their properties. So the developers pay and they are anything from $30K to $60K or $70K for one quite modest property. You can see why these companies are eager to sell them because particularly that company that we were dealing with, had we bought those properties they would have made almost $200K upfront. So it's the greed factor that kicks in on an unsuspecting prey. Their clients are really are up against it.
Now I want to put together some dot points to provide you with some clarity on this topic.
- Negative gearing like anything else requires ideal conditions to be profitable.
- You need to buy in an area that has significant potential for growth. And so generally that means a good suburb in a capital city.
- You need to be willing to hold it from minimum 10 years preferably 30 years and you also need to have a decent income so that you can cover the shortfall. Negative gearing is actually where you get a tax refund on the loss that you've made on the holding costs of that property. But like say if you're in a 37% tax rate you're still going to have to cover another 63% of loss. So it's quite a lot of money to cover.
- There have been changes to the law flag the opposition is very keen on changing that law. It's something that may change in the future, thankfully not for this period of office.
- It's not something that you would take on late in your life cycle. So if you're in your late 50’s buying a negatively geared property which is what a lot of people do, is crazy because you're not going to be working for long enough to be able to hold the property and carry the loss for that property to be able to grow.
- If you're going for a negative geared property be very wary of house and land packages and also units off the plan. They are generally overpriced because they have very large commissions built into them. This also brings in the greed factor. So the people selling these properties obviously there's no end of supply and the commissions are significant. There's definitely a reason for them to be quite aggressive about selling them.
- House and land packages are often properties that are really young in their lifecycle. So it takes a long time for them to get established before they start growing in value. So you're behind the eight ball for quite a few years before you can start seeing any movement.
- If a company is providing education and sourcing the property for you there's a problem. There needs to be some separation of those elements of your property journey. Also one stop shops same deal where the legals, broking, sourcing of the property are all intertwined. That's not a good situation, you need checks and balances. You need some separation between those elements of purchasing a property.
And like I think a lot of us, and this was certainly a mistake I made. I thought I didn't have the time to figure this out for myself but seriously you really do need to. It doesn't mean you need to do everything yourself, you need to get a bit savvy about it because otherwise you are a sitting duck for unscrupulous operators. So on that note I'm going to finish off and say thank you for listening. If you have had a similar experience or a negative experience with negative gearing. Unfortunately, two negatives don't make a positive.
Come over to She Renovates Facebook group the free Facebook group because I really think that we need to get this out there so not so many people get trapped in their web. And also if you could take some time to write a review go over to iTunes and write a review for us. I would be very grateful and if you do happen to write a review take a snapshot of it.
Send it to me: [email protected] and I will provide you with a free copy of the “Secrets Of Property Millionaires Exposed”. This is a book that I contributed to recently but in it there are quite a few property experts with various strategies and including Chris Gray that I mentioned earlier in this podcast. If you are interested in negative gearing you can get his take on it and basically you just need to pay the postage and you can have that book for free. It's valued at $29.99 and that will be my thank you gift to you for taking the time to write a review. So on that note I will sign off and I'll see you next week.