The evils of Negative Gearing?

article_05082013Barely a day goes by in the media that there isn’t an article published discussing the challenges of the Australian housing market and how much prices have risen over recent years. The long held ‘Great Australian Dream’ of owning your own home is frequently trotted out to tug at the heart strings of TV viewers when trying to find a suitable scapegoat for sky high property prices. Throughout much of 2014, focus was being placed on foreign investors landing on our shores with suitcases full of money and pricing us locals out of the market. Currently the place for blame is on negative gearing. Whilst I’m happy to¬†agree that negative gearing may have had some contribution to price rises, it’s important to take into account the huge amount for factors at play here. Although I’m no economist, it doesn’t take a genius to realise that the combination of negative gearing, foreign investment, historically low interest rates, ease of finance, ongoing agent under-quoting and the sense of urgency portrayed in the media all play a role. Not to mention the fact that almost 70% of Australians choose to live in capital cities and that there is only so much land available in these relatively tiny pockets of our enormous country. Geography and demographics certainly play a role.

Of course I’m biased…but while I do think that negative gearing has an important role to play in supporting investors and in turn the housing market in Australia, I agree with statements made regarding investors only investing in property simply for the tax advantages. To me, purely investing for the benefits of negative gearing is completely the wrong approach (although plenty do it). Following here are two videos worth a watch. The first is a clip from ‘The Project’ on Network 10 which aired last night and fired me up to write about this topic. Pay careful attention to the generalised statements and overall tone of the clip, it’s enough to make you go out and push the nearest property investor under a bus. The second clip by well known Australian property investing¬†wunderkind Nathan Birch is intriguingly entitled Negative Gearing Sucks Balls. Nathan’s explanation about negative gearing and why people get caught out by it is spot on in my view. My thoughts? Negative gearing is a useful bonus for investors but certainly not a reason in itself to invest in property. Check out the clips below and make up your own mind!

The New Build – Part 2

One thing that I always do when looking at any type of new property is to get the camera out and take a lot of photos. It’s great to have a visual reminder of what you’ve seen and with digital it’s also usefull to have dates that the photos were taken. This has been particularly handy when I look back over the time that this new build has been in the pipeline. Amazingly, sifting through photos reminded me that the very first steps on building from scratch were taken over 2 years ago in early 2013. It had been around 12 months since the last property purchase and that’s usually around the time that I start to get itchy feet and think about what the next step could be to expand the portfolio. As I mentioned in the last post there are a number of attractive options about buying off the plan and it was exciting to think about trying something new and learning about the construction process rather than simply another established property. So it was time to get out and see what options were available.

When an agent is marketing a new development they will often have lots of nice glossy brochures with lovely architectural drawings of brand new homes surrounded by lush landscaping and beautiful, well established trees. Whilst these pictures look nice, it’s important to see some real-life examples of similar projects. In January of 2013 I spotted a new project that looked promising and the agent was able to take me to view a similar project (by the same builder) just nearing completion. The new project designs were very similar to the one I was interested in and as you can see from the attached pictures it’s useful to be able to view the finished product from the outside as well as the finishes inside.

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Having seen some examples of the finished product it was then time to go and view the proposed site of the development. One thing that is not uncommon in this area is to see older homes on massive blocks of land where the owner sells off the majority of their land to a developer and remains in their original house. This was what this proposed development was and unfortunately I’m just not a fan of it. You end up with a bunch of new homes sitting in what was the back yard of an older house and you have a narrow driveway going down the side to access the residences. Also, the old house in the front of this development wasn’t an architectural masterpiece and the actual location of the development was right on the edge of town. It just wasn’t quite what I was after. The quality of the properties, yes; the location and project layout, unfortunately not.

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So although it was back to the drawing board (to an extent) it certainly wasn’t a waste of time. I had a good idea of what you could get for your money, the quality of the product and also what I was after as far as layout of a development.

Fast forward 10 months…

First Class Friday

To finish off the working week let’s see what you could spend your spare money on. Realistically most of us could barely afford the letterbox of this place but if you have a spare $65 million lying around you might be interested in the Liongate Estate. Built in the 1930’s you could live it up like the Fresh Prince in this Bel Air mansion. 24,000 square feet provides you with a generous 11 bedrooms but you may struggle to locate a toilet as there are only 17 bathrooms. The swimming pool (with fountains), tennis court, movie theatre, massage room, gym and ballroom all add up to plenty of work for your team of housekeepers. Kenny Rogers owned this house in the 1970’s but since he moved on it’s expanded in size considerably. Check out the before and after pics below. The videos are enough to make you run to your Bentley and get the cheque book out of the glove box!


And this video is worth watching simply to see them getting their money’s worth out of the flying drone mounted camera!

The New Build – Part 1

Yarra1Yarra2So it’s been a while since I’ve posted a blog about what’s been happening in my world with regards to property. Whilst the major activity for 2014 may have appeared to be the renovation rescue, there was something else going on in the background that had started well before I signed on the dotted line for the reno property; a new place, built from scratch! In late 2013 a new and exciting part of the property journey commenced with contracts signed to build a new 2 bedroom townhouse in a suburb of Ballarat called Sebastopol. All of the properties purchased so far have all been established homes aged between 10 and 40 years old and although they have all been very successful there are certain benefits (and some drawbacks) to buying off the plan and building something new.

  • Firstly, you get everything brand new and one would hope that it means things work, it looks modern, attracts good rent and requires minimal maintenance as it has new appliances and services.
  • Secondly, a new property brings with it substantial depreciation benefits at tax time. With the older properties you can claim depreciation on the fixtures and fittings within the property (carpets, curtains, heaters etc) but if a property is built after July 1985 then you can also claim depreciation on the actual building itself. This can make a significant difference with your tax return and subsequently how you manage the cash flow on your investment. (Check out this previous post for an overview of depreciation).
  • Thirdly, you can manage to save significant money with a reduction in the stamp duty that you pay on the purchase of the property. When purchasing off the plan the stamp duty is calculated on the property value when the contracts are signed. For a property such as this it’s based on a vacant block of land with nothing built on it so is a lot less than if it was an already established home.
  • On the flip side, a major drawback with a new build is the amount of time that it takes. The contacts were finalised in December of 2013 for this property and with a scheduled start date of Feb 2014 for building it ended up being pushed into the second half of the year due to demolition issues with a house that was already on the land. The anticipated settlement is April/ May of this year (I’m expecting May).
  • Another thing that would work for some and not others is that you have little (practically none at all) scope to make any alterations to the design of the property itself. I certainly don’t mind though as it’s a good design and a build for investment, not to live in. That said, you do get a selection of interior options regarding cabinetry, paint, carpets etc.

So activity started in the second half of 2014 and I’ve been regularly stalking the builders to track progress. Keep an eye on future posts to see how the build progressed and if it looks anything like the pictures above!