Investing in Property: What is negative gearing?

October 31, 2014
Negative gearing has often been touted as a great way to purchase an investment property and reduce your tax bill.

Those promoting the strategy often highlight the tax credits that are available for the would be property investor who owns and rents out the loss making property, claiming that “The tax man and your tenant will help you pay off your mortgage”.

In this article, I’m going to answer the question “What is negative gearing?” by explaining how negative gearing works and providing an example of the pre-tax and after-tax losses, so that if you’re thinking about investing in property, you’ll understand why this investment strategy may not be suited for your goals.

Background:

If you’re looking at investing in property, then you’ve probably seen plenty of advertisements from developers and other companies that claim that by using the equity in an established family home as a deposit, $50 a week is all it takes to own your own investment property. What’s more, their staff will manage the whole process for you, from locating and acquiring a property through to locating tenants and managing the property.

Now, there’s one part of this deal that is glossed over, and that is the where and how you will locate the funds required to pay for this loss making property – because it means you’re going to have to either earn more, save less or spend less. Using their quoted $50 a week figure, that’s $2,600 per annum – and this figure could blow out quite easily if they are unable to locate a tenant to rent the property immediately.

How does Negative Gearing Work?

However, let’s explore the “tax benefits” from a negatively geared investment property a little closer with an example, and you’ll begin to understand why I don’t like negative gearing.

I’m going to assume that you’re earning an average wage/salary from your job (ie in the $37,000-$80,000 per annum bracket).

For every $100 that you earn from your job, the ATO will take $31.50, leaving you with $68.50 that you can spend, save or invest.

Now, with negative gearing (or any other tax deductions), the equation works in the reverse – for every $100 that you spend on the property, such as on the interest on the loan, council rates, water rates, property management fees, it will reduce your tax liability by that amount and you’ll get $31.50 back.

Negative Gearing Example:

To explain this a little better, I’ll use a quick scenario. Let’s assume that you decide to purchase a $400,000 home as an investment property – an average 3 or 4 bedroom home that is in a reasonable suburb of Adelaide – perhaps it’s in the same suburb you live in, or a neighbouring suburb. After all, that’s where the majority of first time investors will be looking to buy.

With a typical 90% mortgage, you’ll need to provide a $40,000 deposit to purchase this property, plus closing costs for the transaction (Stamp Duty, Transfer Fees, etc) which will cost just over $20,000 by the time you pay your conveyancer.

In this scenario, I’ve based the calculations on borrowing 90% of the property with the 10% deposit being funded from cash, however it may be possible to borrow against the equity in your current home to use as a deposit.

Interest rates are very low at the time of writing this article, so you should be able to borrow the funds to purchase this property at about 5.79% variable rate, or possibly even lower if you agree to a fixed rate loan. Let’s see how this plays out in the table below.

Rental Income ($390/wk) $20,280.00
Management Expenses (7.7% of rent) $1,561.56
Interest Expense (5.79% pa) $20,844.00
Council Rates $1,500.00
Water Rates $900.00
Landlord’s Insurance $600.00
Gross Loss $5,1256.56
Tax Credits from ATO $1,614.55
Shortfall to be funded (Net Loss) $3,511.01

Based on the scenario above, if you owned that negatively geared property, you would need to find $3,511.01 per annum from your household budget to fund the loss ($67.52 per week).

Again, this is assuming zero vacancies in the property.

Now, how many properties can you afford to buy and own if each property that you own is going to require you to find about $3,500 per annum from your budget to offset their losses? One? Two? Perhaps three or four at a stretch, but I’m sure you’d definitely be feeling the pinch on your family’s budget by that point and find yourself questioning why you’re investing in property.

How can you make money from a negatively geared property:

In order to make money from a negatively geared property, the property that you’ve invested in needs to appreciate in value, by more than what you’ve lost in holding costs.

This is easy to achieve while the market is booming, however during a flat or declining market, which is what we’ve been experiencing in Adelaide since 2010, then it really starts to become a questionable investment, forcing you to hold onto the property for longer, hoping for capital growth to offset your accumulating losses.

This then starts to become more about how long an investor can afford to continue bankrolling a loss making property hoping for a successful outcome, which begins to remind me of many casino games, rather than being about holding onto a skillfully selected investment, where the expected return is known before it is purchased.

What is the alternative to negative gearing?

The alternative is purchasing (or creating) a positively geared rental property.

These are properties that will provide you with an additional income stream, as their expenses are lower than the rental income that you can earn from them, meaning that they’ll put money into your pocket every month.

Assuming the reverse of the situation above, where the property is able to provide you with an income of about $3,500 per annum, then how many of these cashflow positive properties can you afford to own? The answer, of course, is an unlimited amount, as each property that you own is going to make you richer, allowing you to purchase more property.

So, why doesn’t everyone invest in cashflow positive property?

Quite simply, because it’s become increasingly hard to locate cashflow positive properties. 

For most “buy and hold” property investors that are looking for positive cashflow properties, this means purchasing properties in lower socio-economic areas, or rural and regional areas.

These “less desirable” areas are typically avoided by first time “mum and dad” property investors because they don’t feel comfortable investing in these areas – they are making an emotional decision about their investing.

How much is a vasectomy?

October 31, 2014

How much is a vasectomy? One of the costs that must be considered is the recovery cost.

It is true that a vast majority of vasectomies are done without any complications whatsoever.

Many men can go into a medical facility in the morning, have the procedure done, and then come home later that day to rest.

After a couple days, life can start getting back to normal, especially when a non-invasive vasectomy has been done.

What Should You Watch For?

In some cases, however, there are some complications with a vasectomy that must be watched for after the procedure. Here are some warning signs to watch out for after your vasectomy:

  • A fever that is either over 100F or about 2 degrees above what you normally run.
  • Blood that oozes from the incision site.
  • Pus that is either oozing from the site or building up underneath surface.
  • Pain or swelling that does not get better or worsens.
  • The incision area is a deep red and/or hot to the touch.

These are all signs that an infection has set in at the vasectomy site. You will want to see a medical professional immediately if you suspect an infection so that an antibiotic may be prescribed. An infection can sometimes be fought off naturally, but an untreated infection can also spread to other areas of your body and create a larger, more serious issue.

Other Recovery Concerns You May Have

How much is a vasectomy? Some of that cost is reflected in after care costs that you may need to have. Outside of the symptoms of an infection, here are some other common complications which you may need to see a medical professional about:

Bruising. Bruises are common with this type of procedure. For painful ones, often ice and an over the counter painkiller can help relieve discomfort while it heals on its own.

Swelling with fluid. Sometimes the incision site and area around it will swell up with blood or clear fluids. These, like bruises, will often heal on their own, but ones that are severely uncomfortable can be drained by a medical professional.

Granuloma. This is a specific type of swelling that occurs near the incision site that is caused by sperm that has linked out of the sperm tubes. These can sometimes resolve on their own, but a follow-up surgery may also be required if this occurs.

Chronic pain. In about 2% of vasectomies, men are left with chronic pain in their testicles. Pain medications and counseling can often manage these symptoms, but in some cases, a vasectomy reversal may be required to eliminate the discomfort.

Sexual dysfunction. In less than 1% of men, an issue with their sexuality arises from the vasectomy. This can range from impotence to decreased sexual desires.

Is a Vasectomy the right choice for you?

How much is a vasectomy? You must be willing to put up with the recovery phase of a vasectomy if you are thinking about having one. As with any medical procedure, there are risks involved that can cause the above symptoms and issues. If the rewards outweigh the costs, however, then a vasectomy could be right with you. Speak with your local medical professionals today to begin the process!

What does a vasectomy cost?

October 30, 2014

It’s come to that time when you’ve got to stop having kids.

You’ve got to eliminate the possibility of an unplanned pregnancy or maybe you just don’t want to risk be trapped by an unplanned pregnancy.

The vasectomy cost that you may choose to pay is often a small price when compared to what having an unplanned pregnancy may cost.

With the price of raising a child at nearly a quarter million dollars today, it’s understandable to be considering a vasectomy.

A Vasectomy Is Birth Control For Men

Rather than risk the complications of birth control pills or the dangers of a surgery that women may bare, a vasectomy is a safe and highly affordable alternative for couples to practice when it comes to effective birth control. The procedure blocks the sperm tubes in a man, preventing any sperm from leaving the body. Despite this blockage, men aren’t prevented from having orgasms or being able to enjoy themselves sexually.

Is a Vasectomy 100% Effective?

Considering the vasectomy cost, a common concern is whether or not a vasectomy is 100% effective at preventing pregnancies. Though no medical procedure is absolutely perfect, a vasectomy is extremely effective at blocking the tubes that help sperm leave a man’s body. There is some planning, however, that must be done immediately after a vasectomy has been performed to prevent an unplanned pregnancy from occurring:

  • Sperm can stay in the tubes before the blockage takes place, meaning that the first sexual encounters a man has after the procedure may also need another form of birth control.
  • Though not common, it is possible for the sperm tubes of a man to grow back together again, reversing the vasectomy processes in about 1 out of every 1,000 men.
  • A vasectomy doesn’t protect against sexually transmitted diseases. It simply provides an effective form of birth control from the male perspective.

What Is the Actual Vasectomy Cost?

There are different types of vasectomies available to men today. The traditional vasectomy, which involves an incision to remove part of the sperm tubes and potentially tie them off with surgical clips. This is done using a local anaesthetic and very little pain is felt. A non-surgical version of a vasectomy is also available, involving a tiny puncture that is used to help reach the sperm tubes and cauterize them, providing a method that heals quickly, yet is still effective. Depending on the type of vasectomy desired and complications that might be experienced, a standard vasectomy cost starts around $350 and can run as much as $1,000.

Is a Vasectomy Right For You?

Not withstanding the vasectomy cost, you must decide if a vasectomy is the right decision for you. Though they can sometimes be reversible or heal on their own, many times a vasectomy is a permanent solution. Weigh all of your options carefully before following through with this procedure, and as with any other medical procedure, speak with your local medical professionals before finalizing any decision. It can be, however, an affordable and permanent form of birth control so that you don’t have to be surprised by a little bundle of joy in the future.