Why negative gearing no longer makes sense

By Kay Rivera | 19 Dec 2018

The Australian Labor party’s proposed changes to negative gearing have opened a lot of discussions across the industry, drawing discouraging reactions from market players.

Many experts have expressed their disagreement with the plan, saying that it could lead to a recession. Polls have also showed Australians’ belief that the modification will cause a significant decline in housing prices.

With that in mind, should investors urgently aim for positive gearing?

In an interview with Your Investment Property, Rich Harvey, buyer’s agent and CEO of Propertybuyer, discussed the possible effects of the proposed changes. He also gave tips on how to have positively geared investments.

YIP: Given the possible changes to negative gearing, should investors aim to become positively geared as soon as possible?
Rich Harvey:
Investors should aim to see a negative-cash-flow investment property become neutral or positive at some point in the not-too-distant future.

Negative gearing is a strategy that only makes sense if the property you are purchasing is going to deliver a far greater capital growth result—[outweighing] the deficient cash flow received by holding the property over a period of time. 

If you are a higher salary earner, then typically you can afford to hold more negatively geared properties for a longer time period. Even those on modest incomes can still use negative gearing effectively, as they are able to use their [taxes] as an offset against negative gearing losses.

However, it is important to remember not to choose an investment strategy purely on the basis of a tax position. Note that if Labor wins the next election, then the policy to abolish negative gearing is only proposed for the established property, and it will take time to get this legislation through both houses of Parliament and then enacted into law (most likely introduction date would be July 1, 2020). And the policy will not be retrospective – if you already own property that is negatively geared, you can continue to use this strategy.

YIP: What are the potential positive and negative impacts of this move?
The move will make investors think very carefully about the cash-flow situation of any future investments.  It will discourage investors from selecting established properties and influence investors to consider new properties. However, this is problematic for several reasons.  These “new properties” are typically located in suburbs or areas where there is low potential for capital growth.

Areas where more rental properties are needed are in high-demand suburbs, in built-up areas near jobs and established neighbourhoods. We are likely to see a significant increase in rents as a result of lower supply of investment properties.

YIP: What steps should investors take when aiming for positive gearing?
As an investor seeking positive gearing should:

  • Create an overall strategy to buy multiple properties. One property will not make you wealthy or achieve retirement goals!
  • Seek professional and independent advice from a buyers’ advocate on where and what to buy.
  • Buy in high-rent-demand areas where there are consistent demand and low vacancy rates – i.e strong employment opportunities.
  • Consider getting a higher yield from the property using a number of smart strategies – by adding value via renovation, adding a granny flat, creating a duplex, leasing fully furnished.
  • Review your rents at least annually and seek increases via your property manager.
  • Look after your tenants well and give them a gift for looking after your property well.
  • Make sure you claim every available tax deduction and keep meticulous records.

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