There was a craze that hit Australia in the 90’s and America in the 2000’s … we know the result, but what was the cause?
It was the ‘negative gearing’ craze …
… people were promoting real-estate purchases on the basis that you take a loss now and make a (hopefully, huge) capital gain in the future.
The benefits that used to be promoted by the real-estate gurus are stated very nicely in this comment on Andee Sellman’s blog:
You have forgotten tax benefits which can be substantial. Also, the actual equity needed to purchase his investment could have been minimal compared to the purchase price. Most importantly, over time the tenant and the tax man pay for the majority of his investment.
Now, I would understand this comment if it were from 2005 or even 2006, but it is from only a couple of months ago …
… if we don’t learn from our mistakes, we are doomed to repeat them!
When real-estate is going up in price, it is easy to get caught in the trap of buying on the basis of future capital appreciation, and use tax deductions on the mortgage and depreciation benefits on the building and improvements to help ‘soften the blow’ as running costs were typically higher than the income (in some places, severely so … yet we still bought!).
Given the current market we all KNOW the problems this causes, but real-estate – and sentiments – cycle every 7 to 10 years, so WHEN you forget what happened in 2007 and 2008 during the next boom, pull up this blog and remember:
Treat your real-estate investment as a BUSINESS.
A real business is bought (or started) because it does (or soon will) produce profits and free cash-flow year in and year out, and then MAY be sold at a future date for a speculative gain. At least, that’s what happened to me …
… I can’t understand why we shouldn’t look at any other investment, including property, exactly the same way?
Can you?!
