If there is anything this recent election has taught us, it is that government can change tax laws at any moment. Property investors were once again under the radar, as labour planned to abolish negative gearing for established properties.
Negative gearing for new properties however, was to remain unchanged to ensure the construction industry remains supported. This was a good idea, since construction contributes to 8% of Australia’s GDP and is the largest non-service related industry, providing millions of jobs and creating housing for our growing population.
For the rest of us investors with portfolios that are heavily reliant on negative gearing, it reminded us that we need to take a look at our property investment strategy. After all, we just don’t know when the abolishment of negative gearing will be back on the political agenda.
Negative gearing is a tax reduction strategy
Although negative gearing has been a feature of property investment since the 1980s (thank you Bob Hawke and Paul Keating), it is essentially a tax reduction strategy and one we have become too reliant on for investing in property.
Negative gearing assumes government tax policy will remaining unchanged. When in reality, it is a controversial political issue and its validity, has been up for discussion since 2016. If any political party were to succeed and rule against negative gearing, a lot of investors would find it difficult to remain in the property market.
Since the aim of property investment is to increase wealth, it makes sense for the investor to concentrate of property investment strategies that produce positive cashflow. Negative gearing is definitely one way to do that. But there are many other strategies that a property investor can focus on to achieve this goal.
Alternative property strategies
The 5 most common property investment strategies are long-term buy and hold, renovate and hold, renovate and sell, trading and developing. Each strategy has its associated benefits, risks and tax obligations.
Whilst not one strategy is necessary better than the other, the strategy you choose, very much depends on your personal goals, circumstances and attitude towards risk and reward.
For example, a buy and hold strategy suits an investor with a low risk profile and prefers to hold property long term for the capital gains benefits. Alternatively, a high risk investor will choose to develop, to increase value for a quick sale or hold long-term for higher rental returns.
The importance of portfolio diversity
The most successful investors understand the importance of a balanced portfolio. This means there is a mix of negative cashflow and positive cashflow properties. An over-reliance on negative gearing will throw an investment portfolio into a high risk category, unless there is a financial buffer in place that will offset any negative effects of tax policy changes.
Investors don’t have to avoid negative cashflow properties altogether, simply assess whether your income supports the loss, or other properties in your portfolio can balance the cashflows. When expenses decrease and rent increases, negatively geared properties become positive over the long-term.
At JR Prosperity Partners, we believe property investment is the best way to increase wealth and obtain financial freedom. Let us help you achieve a balanced portfolio to support your property investment goals. Contact us today on (02) 9635 1991 or via email: email@example.com