2001 was not a good year for me. For the first time in my life, I was unemployed after several years of continually rising paychecks. I had grown accustomed to my lifestyle and can remember vividly being at a gas station on a cold November night filling up my convertible Corvette with premium gasoline. I was approached by someone asking me for money. I shrugged my shoulders and said I could barely pay for the gas I was putting in my car. The irony of the fact that I was driving a semi-expensive sports car while claiming to be broke occurred to me much later.
Seeing as times were tight, this self-proclaimed movie buff had to give up some luxury items. Unfortunately, going out to movies was one of the first things that we gave up. That is until one night I was walking around the grocery store in a haze trying to stick to the absolute necessities and trying to do it cheaply. My shopping list had soap on it and I was trying to get the cheapest soap possible. That is until I noticed a promotion run by Lever 2000 claiming free movie tickets. Again, when something seems to good to be true, I usually assume it is not as it seems.
I stopped in my tracks and start looking for fine print. Surely, there were restrictions on the dates the tickets could be used. Nope. There must be restrictions on certain movies not qualifying. None that I could see. OK, only certain theaters would be eligible. Again, it looked like every theater I frequented was eligible. What’s more, the soap didn’t cost any more than any of the other soaps I was considering buying. There had to be something wrong here, but I couldn’t figure it out. I was looking at purchasing a non-perishable necessity, it would cost no more than any of the other choices, and it would give me a bonus luxury item that I really wanted. I decided to risk it and bought about a two year supply of soap.
It wasn’t until Julie and I went to see “Blackhawk Down” on a Friday night that I believed the promotion was legitimate. For the next few months, every time we saw a movie we used our “movie soap tickets”. There was absolutely no downside. Sure, the soap lasted a lot longer than the tickets, but we eventually used it all. Additionally, the soap was really a necessity and the movie tickets were just a bonus. I bought something that I needed and got something that I wanted too. A real win-win and one of the only times where too good to be true worked out.
On the opposite end of the spectrum is the phenomenon seen through companies like Groupon. I really have nothing against Groupon, if someone is going to buy a good or service at a discounted rate that they wouldn’t ordinarily purchase, fine. However, there is a certain mindset that believes they are SAVING money when using a Groupon versus spending money.
For example, say a massage is ordinarily $100. I really don’t care for massages and would never spend $100 for a massage. If a Groupon came out offering a 20% discount, I would never say, “I’m saving $20!” I would think that I was still spending $80. That’s just me as obviously this model is extremely successful and the company is experiencing rapid growth. The problem is that plenty of folks believe that they are saving money by purchasing goods or services that they ordinarily would not even consider because they are saving. It is only saving if you would have bought the good or service anyway, like “movie soap”.
Back to the housing bubble. I walked around a $1.8M condo with a mortgage, property tax, and insurance payments that cost over $12,000 per month being rented out for $6,000 per month. My brain could not simply process the information. I kept checking my math and wondering how could this be.
I then expressed it out loud to a native Australian and received a response back of, “Silly American, the property is negatively geared.”
I moved on with our property search and made a mental note to figure out what negative gearing really means. In Australia, home owners cannot deduct mortgage interest from their income the way they believe Americans can (Americans can but, they lose the standard deduction, so it really only affects those in the higher end of properties). Under negative gearing, Australians who purchase an “investment” property can deduct the difference between mortgage payments and rent payments. In the above scenario, the property was negatived geared to the tune of about $6k per month. Assuming the “investor” was in the highest tax bracket, he or she would then get the equivalent of $2k back in the form of a tax shelter.
Although receiving two grand a month back is nice and all, it amounts to little more than a bit of Vaseline for the $4k they would be losing PER MONTH. No one likes paying taxes, but losing four thousand a month just to avoid paying a little bit in taxes is not a winning strategy. Of course, if using negative gearing, the “investor” were losing $48k per year, but the property appreciated 8% over the course of the year, the “investor” would have made $100k in profit. Entering a business venture with the expectations of making a six figure profit over the course of a year is entirely rational. However, using an expected rate of return of 8% on property, which should provide a rate of return near the rate of inflation, is not rational. The fact that some of the losses can be used as a tax deduction will be of little concern once property values start falling. Negative gearing makes about as much sense as buying a massage for $80 because it used to cost $100 and thinking that you are saving money. Negative gearing certainly isn’t the “movie soap” that “investors” portray it to be.
Seeing as times were tight, this self-proclaimed movie buff had to give up some luxury items. Unfortunately, going out to movies was one of the first things that we gave up. That is until one night I was walking around the grocery store in a haze trying to stick to the absolute necessities and trying to do it cheaply. My shopping list had soap on it and I was trying to get the cheapest soap possible. That is until I noticed a promotion run by Lever 2000 claiming free movie tickets. Again, when something seems to good to be true, I usually assume it is not as it seems.
I stopped in my tracks and start looking for fine print. Surely, there were restrictions on the dates the tickets could be used. Nope. There must be restrictions on certain movies not qualifying. None that I could see. OK, only certain theaters would be eligible. Again, it looked like every theater I frequented was eligible. What’s more, the soap didn’t cost any more than any of the other soaps I was considering buying. There had to be something wrong here, but I couldn’t figure it out. I was looking at purchasing a non-perishable necessity, it would cost no more than any of the other choices, and it would give me a bonus luxury item that I really wanted. I decided to risk it and bought about a two year supply of soap.
It wasn’t until Julie and I went to see “Blackhawk Down” on a Friday night that I believed the promotion was legitimate. For the next few months, every time we saw a movie we used our “movie soap tickets”. There was absolutely no downside. Sure, the soap lasted a lot longer than the tickets, but we eventually used it all. Additionally, the soap was really a necessity and the movie tickets were just a bonus. I bought something that I needed and got something that I wanted too. A real win-win and one of the only times where too good to be true worked out.
On the opposite end of the spectrum is the phenomenon seen through companies like Groupon. I really have nothing against Groupon, if someone is going to buy a good or service at a discounted rate that they wouldn’t ordinarily purchase, fine. However, there is a certain mindset that believes they are SAVING money when using a Groupon versus spending money.
For example, say a massage is ordinarily $100. I really don’t care for massages and would never spend $100 for a massage. If a Groupon came out offering a 20% discount, I would never say, “I’m saving $20!” I would think that I was still spending $80. That’s just me as obviously this model is extremely successful and the company is experiencing rapid growth. The problem is that plenty of folks believe that they are saving money by purchasing goods or services that they ordinarily would not even consider because they are saving. It is only saving if you would have bought the good or service anyway, like “movie soap”.
Back to the housing bubble. I walked around a $1.8M condo with a mortgage, property tax, and insurance payments that cost over $12,000 per month being rented out for $6,000 per month. My brain could not simply process the information. I kept checking my math and wondering how could this be.
I then expressed it out loud to a native Australian and received a response back of, “Silly American, the property is negatively geared.”
I moved on with our property search and made a mental note to figure out what negative gearing really means. In Australia, home owners cannot deduct mortgage interest from their income the way they believe Americans can (Americans can but, they lose the standard deduction, so it really only affects those in the higher end of properties). Under negative gearing, Australians who purchase an “investment” property can deduct the difference between mortgage payments and rent payments. In the above scenario, the property was negatived geared to the tune of about $6k per month. Assuming the “investor” was in the highest tax bracket, he or she would then get the equivalent of $2k back in the form of a tax shelter.
Although receiving two grand a month back is nice and all, it amounts to little more than a bit of Vaseline for the $4k they would be losing PER MONTH. No one likes paying taxes, but losing four thousand a month just to avoid paying a little bit in taxes is not a winning strategy. Of course, if using negative gearing, the “investor” were losing $48k per year, but the property appreciated 8% over the course of the year, the “investor” would have made $100k in profit. Entering a business venture with the expectations of making a six figure profit over the course of a year is entirely rational. However, using an expected rate of return of 8% on property, which should provide a rate of return near the rate of inflation, is not rational. The fact that some of the losses can be used as a tax deduction will be of little concern once property values start falling. Negative gearing makes about as much sense as buying a massage for $80 because it used to cost $100 and thinking that you are saving money. Negative gearing certainly isn’t the “movie soap” that “investors” portray it to be.
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