I am not a fan of negative gearing, but removing it overnight would be reckless. Meanwhile, there are a lot of investors struggling to hold onto properties they can’t afford, while our government shells out tax refunds to prop up investors. All the while we’re padding the pockets of banks by paying interest on overpriced and underperforming properties!
Does this really make any sense? In my interview below with Your Investment Property Magazine we break down how this government policy is affecting investors in the post-COVID economy, and what you can do if you’re struggling to hold a negatively geared property,.
Survival Guide For Negatively Geared Investors
By Mark Rosanes | Your Investment Property Magazine | 29 May 202Are you an investor struggling to meet repayments in the current economic climate? Is your negatively geared property compounding your financial woes? Find out how you can turn negatively geared properties into positively geared investments.
Australian property investors who previously enjoyed the tax benefits of negative gearing are experiencing a double whammy from the economic impact of the COVID-19 pandemic. Already reeling from a sudden drop in income as business shutdowns threaten their job security, they now face additional financial squeeze as tenants struggle to make lease payments.
With their incomes slashed – if not completely taken away – these investors are under tremendous financial pressure to keep their property loan repayments covered, causing many to “re-think the make-up of their property portfolios.”
Ian Ugarte (pictured), property investor and co-founder of Small is the New Big, recently talked to Your Investment Property to share his thoughts on how investors should approach a depressed market, what strategies they should take to turn negatively geared properties into positively geared investments, and what the future looks like for Australia’s housing industry.
COVID-19 and negatively geared properties: A “perfect storm”
The coronavirus pandemic has created unprecedented economic disruptions in Australia’s property market, putting many investors in a bind.
“What we are experiencing is a very confronting ‘perfect storm’ of reduced income and job losses which are causing fear and panic in the marketplace. It’s something that Australia has never seen before,” said Ugarte.
He added that mum-and-dad investors with negatively geared properties were among those most adversely impacted financially.
“Many had tenants who were affected by COVID-19 and no can longer afford the rent but were able to stay on in the property due to the rental moratorium. This has left landlords bearing the brunt of reduced or no income from the investment to service the debt,” he said.
Ugarte also said that there were instances where tenants on visas had to abruptly leave the country due to the outbreak, leaving some properties vacant.
“Faced with their own job uncertainty, mum-and-dad investors are left exposed, with some unable to continue to meet their financial commitments and forced to sell, often at a significantly reduced price,” he said.
Turning negatively geared properties into positively geared investments
Ugarte explained that a re-think has never been more important for investors experiencing financial distress during these challenging times but emphasised that “selling in a depressed property market was never a good idea.”
He laid down a range of options investors have beyond selling the property, including talking to banks about reducing payments by switching from principal and interest to interest-only repayments, and seeking out a more competitive lender and refinancing their loans.
Ugarte also advised investors to review their insurance needs, seek premium relief from insurers, and negotiate with agents to reduce letting fees in the short-term.
He added that “integrating co-living strategies like micro-apartments on standard residential properties” was the “easiest and most affordable” way to generate positive cashflow.
“COVID-19 has shone a light on the mismatch in supply and demand when it comes to Australian housing. Currently, 60% to 80% of people looking for accommodation are singles and couples. Unfortunately, 60% to 80% of the available properties are three-, four- and five-bedroom houses,” Ugarte said.
“As it is, the majority of affected renters are doing whatever they can to reduce their expenses – and one of their biggest expenses is their rent. They just can’t continue to pay former market rents, nor can they afford to pay for the luxury of extra space and rooms they don’t use or need.”
He explained that by dividing properties into smaller independent dwellings, property owners can reduce rent by a third to half and still get an average of $300 to $900 weekly “more than the rental next door.”
“Realistically, the only way to future proof your investment so you can weather a degree of market volatility is to make it adaptable,” Ugarte said.
“Properties that are truly adaptable can cater to the needs of one type of tenant one day, and another type of tenant the next, ensuring your property can always meet rental demand.”
How can “Small is the New Big” help investors?
“At our core, the team at Small is the New Big is committed to changing housing policy in Australia to combat the rising problem of homelessness,” Ugarte said.
He said this was done by running educational campaigns to ensure mum-and-dad property investors make informed choices and understand the “full-range of options” available to them.
The team also helps guide investors who are interested in buying a new property, converting an existing property or, for those who can’t afford to buy a property yet, adopting their “rentrepreneur” strategy.
Ugarte said that they also have a “buyers agency,” which specialises in sourcing and building cashflow positive properties for investors with an 8% to 11% gross return. The system enables investors to be completely “hands off” in the entire process.
What lies ahead for Australia’s property market
Ugarte said that the nation’s property market was due for a boom after experiencing a major setback.
“I’m feeling positive about the property market bouncing back, whether it be in the form of a ‘V’ shaped recovery in the short term, or a ‘W’ shaped recovery should we get a second wave of COVID-19,” he said.
Ugarte predicted that the current dip in the property market will be followed by an uptick then another small drop before finally surging towards the end of 2021, when he expects to “see one of the biggest years in property cycles” in almost two decades.
“But right now, you’d expect the median price of most properties to drop because the only real movement is by sellers who are desperate to sell,” he said.
Learn more about how to build your positive cash flow property HERE.