Negative gearing

An easy way to profit from residential property or a fashionable way to lose money?
 
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  • Updated:7 Jan 2006
 

07.Case study: sales job

Bob and Kaye bought residential investment properties some years ago, through a company that advocated negative gearing for tax savings and capital gains.

“We were flown to Brisbane at a very cheap fare, met at the ‘Golden Wing’ at the airport and taken to the company’s office,” Bob says. “A consultant gave us an analysis and projections of the benefits of owning rental property, mainly based on tax savings and capital gains. It essentially promised high rewards, limited risk and little effort. The salesman’s major selling point was reduction of taxation through negative gearing.”

Bob and Kaye were taken to see town house complexes in two locations. Bob’s suspicions about the value of one of the properties were aroused when he read the valuer’s report, which the company provided. “The report concluded that the property was ‘of the type that has been successfully marketed to the residential negative gearing market rather than local owner occupiers’.”

After some pressure and despite the warning signs, Bob and Kaye agreed to buy a property in each of the locations they were shown. “We were next hustled to a lawyer chosen by the company, but supposedly acting on our behalf, to sign the contract documents. Next, bank loans were arranged, again through the company.”

According to Bob, over the next three years it became apparent that one of the properties had been worth far less than they paid for it, with similar houses in the same area selling for less. Revaluations after three years showed it was worth $25,000 less than they’d paid, while the second property had shown a small increase in value. Bob says he decided they had been targeted by ‘two-tier marketing’ – a sales practice where out-of-town investors are sold property at higher prices than locals would pay.

Fortunately both properties have been occupied by tenants for most of the time, with rents growing regularly. But more importantly, Brisbane’s subsequent property boom has helped make up for the above-market prices Bob and Kaye think they paid.

Investors who pay over the odds and negatively gear into a slower property market (or who sell before a boom) mightn’t be so lucky.
 

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