People think the definition of investing is making a sacrifice today to gain something tomorrow. However, some people seem to forget the part about “gain”.
Making money out of negative gearing is like taking out a personal loan at 6% interest and sticking it in the bank at 2.5% with the hope that it will go up to 8% savings rate. WHAT IF IT DOESN’T? And then you have to loan back the loan at the end!
The only gain that people who negatively gear their properties receive is capital gains. To do this, they have to lose money every month, hoping that the value of their property will go up more than what they’re losing. They can offset their losses with tax deductions to hopefully make the eventual profits. But really! Why risk it?
So, why is paying taxes that big of a problem?
That’s the thing – it’s not. Paying taxes means you’re making money. Isn’t that the whole point of investing?
The first rule of business is that cash flow is king. With negative gearing, you property sucks out your cash every month.
The only way to make money is to sell your property. This is how you actually get the profit for all the trouble that you have to go through.
Or is it?
Let’s say you sell the property for a $100,000 profit. If you had held onto it, you might’ve made twice as much in the next few years with the right strategy. Not only would you have missed out on this money, but you’d have also stunted the growth of your portfolio.
My point is that investors who negatively gear may not be thinking long-term. Instead, they put so much focus on getting tax deductions that they forget they could be making a lot more cash.
Even the government is trying to put a stop to this, with the Labor Party wanting to abolish the tax incentives of negative gearing existing properties.
Having said all this, I think it’s the right time to consider a more viable and fruitful strategy.
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