There are currently 1.3 million Australian tax payers who utilise negative gearing to offset their income to receive some of their tax back from the Australia Taxation Office.
According to the Federal Treasurer, Mr Frydenberg, among those using negative gearing "are 58,000 teachers, 41,000 nurses and 20,000 police and emergency services". But it is the wealthy who benefit the most. The top 20 per cent of those negatively gearing get 53 per cent of the benefit, according to the Grattan Institute.
Labor promised if they won the next federal election they would reform negative gearing so it only applied to investors buying new properties and completely abolish it for anyone buying existing properties moving forward. The latest Labour Government announcement is saying that it will also be further watering down new properties by allowing only 50% negative gearing from 1 January 2020.
"We will put the great Australian dream back within the reach of the working and middle class Australians who have been priced out of the housing market for too long," Mr Shorten said in 2016. Labor's rule change would not affect people who are currently negatively gearing investment properties.
Furthermore by reducing incentives for property investors there is likely to be less property investment in the future reducing the number of properties available for rent. The basic economic law of supply and demand means that rents should increase and the value of existing properties which has no negative gearing benefits allowed will go down in value. How much?, no one really knows but it will be down.
So given that this seems to be labour's election to lose, how should we approach property investment without the benefits of negative gearing? ...well do the opposite.
What is Negative Gearing?
Gearing means to borrow money to buy an asset. In layman's terms, negative gearing happens when the income your property makes doesn't cover the expenses of the borrowed funds, or simply, the property costs more money than it makes you. Meaning that you're resulting in a loss. The benefit of negative gearing in Australian law, means, that if you're property is making a loss, you can deduct those losses from your taxable income.
Positive Gearing
Instead of creating a cash loss through your property (ie. rent - expenses - interest - depreciation = loss) to offset your income. You can create a cash profit and offset it with depreciation to reduce your tax bill. It's the opposite of negative gearing. In layman's terms, get a property that makes a hell of a lot more than what it costs you, so your income actually increases. Then claim back depreciation to offset the taxable income made fro the property.
There is a small selection of highly profitable positive cashflow properties available in the market these days. Often you will find dual occupancy houses, duplexes, small complexes. But the best property for implementing the highest yielding positive gearing are Multi Occ's (rooming houses). You can earn up to 10% gross rental yields for houses located 30 minutes from a major CBD zones. Not only will your property cashflow not be affected by proposed Labour Government tax changes but rents will also grow faster further increasing your cashflow.
Retirement Cashflow
You won't have to worry about paying capital gains tax on your property at the increased rate of 75% of the gain (up from 50%), another Labour Government initiative, because you will never want to sell the property which will provide you with your retirement income. Rooming houses can pay off all their debt from cashflow in 12-18 years assuming 80% gearing when the property was initially purchased.
Manufacture Equity
The property cycles have changed direction and we are all well aware of a general slowdown in house prices in Sydney (-10.9%), Brisbane (-1.3%) and Melbourne (-9.8%) in the last 12 months (CoreLogic). We have entered a cycle of slower economic growth both at home and globally. The new Labour Government policy will result in downward pressure on the value of existing properties. This means we need to change our property strategy to continue to make equity while we cannot rely on capital growth alone in the short term until the property cycle enters its next growth phase. Which it will!
We can do this through buying land in in-fill locations and building houses for less than existing comparable houses thereby manufacturing equity. An in-fill location is a developed area with limited available land through subdivision of existing larger properties. The advantage of infill, is there is already existing infrastructure and plenty of comparable houses for a valuer to compare your investment property to. If you know where to buy and what sort of house to build you will often create equity of 10-20% or more. That's the equivalent of 1-2 years of strong capital during the build period of 6 months.
Conclusion
This is the Labour Government's election to lose, but YOU the property investor, now has an opportunity to make the best decision when purchasing your next investment property. Some people will sit on the sidelines and wait for things to pick up next year whilst others will dive in and take advantage of the current market conditions which have never been better to increase your property portfolio cashflow and bring your retirement even closer. We have found more of the highest yielding, fastest chunk deals in the last 6 months than we have over the last 2 years.
If you have the capacity to invest in this current market, don't hesitate, you will be sure to land an amazing deal and set yourself up for the future. Just make sure its a cashflow stronghold in an area for future long term growth. Not having to rely on government policies or changes (like negative gearing) will give you a lot more confidence for the road ahead.
The media is fueling fear and as Warren Buffet says; "Be fearful when others are greedy, but be greedy when others are fearful". Get advice from the experts. Call us today..
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