Wednesday, July 7, 2010

Negative Gearing and Australia

HA and I have friends here in Oz that have been investing in properties throughout Canberra in the last couple of years. HA really wants to get into the invest property business and has asked me if I'd be interested in going in on a property together.

I've thought about it and I do think that buying a property in the CBD of Canberra would be a good idea. With so many government officials here and contractors for government agencies and the university, I doubt there's ever a shortage of people looking for properties.

My general issue with it is that the price of property in this country is OUTRAGEOUS. I couldn't afford to own my own home in this country. The apartment I live in, which about a third the size of my house in Phoenix, runs, easily, for mid-six figures. That's a one-bedroom, one-bathroom. What makes it even crazier is that salaries aren't adjusted for this higher cost of living. So given that, I'm not sure how my friends, who make realitively the same amount of money as I do, can afford their own rent, plus the mortgages of their multiple investment properties.

In theory, the investment properties should pay for themselves. Or at least I would think that's how it's supposed to work. But no so in Australia. In Australia, they do this thing called Negative Gearing. Here's how it works as I understand it - You buy a property that you plan on utilizing as an investment. The weekly mortgage is $750 but they're renting it out at $650 a week. Clearly there's already a $100/week loss. Then when they do their taxes, these losses are fully deductible and depreciation is taking into account. This will typically provide the owner with a much larger refund which then offsets the losses of the property.

So my question is - how is this a good idea?? I feel like I must be missing something about this whole scheme. If you read about this on Wikipedia, it doesn't sound like a good idea at all and apparently, this is illegal in most other countries. Am I missing something? Could I be an Australian real estate mogul but I'm too dense to realize it?

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