From their website on April 15, 2004

Truth #1: Negative gearing is a strategy guaranteed to lose money 

A negatively geared property is designed to enable you to access an immediate tax deduction arising from the shortfall of rental income failing to cover your property expenses. 

In other words, negative gearing is a strategy guaranteed to make a loss. 

In order for you to afford this loss, you'll have to fund it out of your existing cash flow by working longer hours, or by taking a lifestyle cut. For most people this means going without some of the luxuries they previously enjoyed. 

No one wants to lose money, but it is testimony to the power of effective marketing that smart investors are fleeced out of thousands of dollars by being conned into a concept that only exists to lose money in the short term. 

The only way an investor can make money from negative gearing is if any potential future capital appreciation is higher than the certain cashflow loss incurred today. 

Negative gearing is a valuable profit-making tool in a rising market. But it is not a strategy for all investing seasons. 

Truth #2: The dangers of depreciation 

Buying a property based on depreciation benefits is dangerous and deceptive. 

Depreciation is an accounting term used to describe the wear and tear of an asset that occurs over time. In practical terms, depreciation on a property refers to the carpet wearing down, the walls becoming chipped or stained and the furniture dating. 

In most new properties you are allowed to claim a tax deduction for the depreciation of the fixtures and fittings and in certain circumstances you may also claim a building write-off of either 2.5 per cent or 4 per cent of the property (not land) value too. 

Slick marketing companies sell the notion of the taxman paying off your property using depreciation and building write-off deductions, but this sales pitch is quite deceptive because you don't avoid paying tax with depreciation, you just defer it. 

Commonsense suggests that depreciating an appreciating asset like property will give you a tax deduction today, but you'll have to repay it in the form of capital gains tax at a later date when you sell. 

'Bracket-creep' issues can catch out many taxpayers too. If you earn $50,000 when you buy the property you will only be able to claim a deduction for depreciation at 43.5 cents in the dollar, but if your income rises to $60,000 when you sell then you'll need to repay the depreciation at 48.5 cents in the dollar. 

If you don't ever plan to sell the property then at a minimum you should recognise that your depreciation tax deduction represents the wear and tear on your asset that will need to be eventually refurbished in order to continue attracting quality tenants. 

Finally, beware any financial model that allows for depreciation benefits but does not include a maintenance budget. You cannot have depreciation without an expectation of repair costs - even new properties still need tap washers replaced. 

Truth #3: The deception of attracting premium tenants 

A common strategy used to sell negatively geared property is to focus on purchasing a blue-chip property that will attract a premium tenant, since a premium tenant is more likely to be a quality long-term and high paying occupant. 

Yet my experience reveals premium tenants are often the most volatile segment of the rental market. When times are prosperous, then premium tenants look for glamorous living in the newest kind of accommodation available with all the modern conveniences. 

But when the economy contracts, premium tenants with high paying salaries are at a high risk of being downsized. If this happens, then they will seek cheaper accommodation leaving investors owning expensive property competing for new tenants in a shrinking market. 

In times of serious recession it's not unusual to expect vacancies of three months or more on premium property, which can make owning negatively geared property an absolute investing cashflow disaster. 

A better strategy would be to attract a quality tenant who is willing to pay between 10 and 20 per cent above the market rate for a well-maintained property and decent landlord service. 

There will always be demand for a house that the average family can afford to live in. It would be wise for you to focus your attention on purchasing a property that is less prone to market fluctuations, and then seeking to charge above market rates for a quality property to attract long-term tenants that want to treat your property like a home. 

Truth #4: Unfair comparisons 

Figures used to substantiate expectations of appreciating property values are in many instances downright deceptive. One common example is the rise in the value of median property prices being applied to premium real estate market. 

In reality property prices can rise and fall in the same market at the same time. To eliminate this variance, statisticians adopt a mathematical snapshot of the market based on the value of median property sold during the period. 

Movements in the median property price are certainly not representative of movements in the highly priced end of the market. Attempts to correlate movements in the median property values to highly priced real estate is statistically incorrect at best and potential fraud at worst. 

Making an assumption that real estate values double every seven to ten years, across all types of property (houses, units, etc.), in all States, is misrepresentative. 


It's very easy to build a financial model and then hide distant reality in broad assumptions or leave out important information all together. For example, making no allowance for vacancies after the rental guarantee period has finished or showing after tax nett profit with no allowance for capital gains tax payable when that asset is sold. 

One quick way to test the conviction of a sales agent promising capital appreciation is to get him to personally guarantee it in writing. Given the degree of their certainty about rises in property value and considering the massive investment you'll need to outlay to own a blue chip property, a written guarantee simply confirming the underlying assumption isn't too much to ask. 

Be very wary of the assumptions used in any financial model. 

Truth #5: Who's really paying for the secret commissions? 

If you liked the idea of purchasing property similar to the one that John purchased (see negative gearing section) then you're probably asking 'Where can I find such a property?' 

Enter the free seminar circuit, which is often little more than an elaborate attempt to sell you an over-priced property that meets the finely-tweaked financial models devised by clever marketing agents who are paid a commission to sell real estate on behalf of developers. 

It's not unusual for commissions to be five per cent of the sales price, which on the property used in the earlier example amounts to $11,500. 

This fee is not paid from the developer's margin. It's a cost added on top and paid for directly by you the purchaser. It can become unnecessarily expensive buying prime property off the plan when there are kickbacks to financiers, fit-out providers and sales agents all funded by you as the purchaser. 

Negative gearing is often sold as a strategy that will make you rich in the future, but when you buy a boutique property you'll be making developers and sales agents rich today. Be very wary about letting other people profit at your expense. 

Remember to always ask 'Who gets paid when I buy?' 

Truth #6: The trap of trying to save tax! 

One of the many sales reasons given for investing in a negatively gearing property is that qualified accountants recommend it. 

Indeed, if you approached most accountants and asked for strategies that legally minimised tax then negative gearing would be one of the first options discussed. 

But investing in negatively geared property to save tax is a double-edged sword. For every dollar you lose, you'll only ever recoup a maximum of 48.5 per cent back as a tax saving. 

While you're waiting for illusive capital appreciation you'll be working longer hours and trying to cut back spending in order to fund the continual cash outflow when your property expenses are always higher than your rental income. 

If you are paying your accountant for advice then spend your money searching for strategies that will earn cash profits, not ways that are guaranteed to make a loss. 

You might pay more in tax but you'll also be earning much more cash profits too. 

Truth #7: How many of these properties can you afford to own? 

As you own more negatively geared property, your after-tax available cash reduces. This is because you only ever recover a maximum of 48.5% in a tax deduction, the remaining 51.5 cents in the dollar comes from your back pocket. 

It makes sense that as you own more loss making property your real buying power shrinks in ever decreasing circles.