The structure of your property’s gearing is vital and although we know that positive gearing is good, hundreds of thousands of investors believe that negative gearing is the panacea for all their problems. Sadly it isn’t.
While many investors happily receive tax benefits from owning a negatively-geared property, not every investor can keep up with their property’s holding costs. Holding costs may include loan repayments, council rates, strata levies, water rates, legal fees, agent fees, insurance, land tax, repairs and maintenance.
The equation used to calculate gearing looks like this: rental income minus interest and holding costs equals negative, positive or neutral. The variable in the above equation is the holding costs, as they vary from state to state and property to property. A smart property adviser will be able to give you the expected holding costs of a property in any state or territory.
When it comes to holding a negatively geared property, here are the facts: Over 1.2 million Australian investors owned a negatively geared property in the 2010/2011 financial year. So it should come as no surprise that 9,900 Australian Google searches are made every month for the term “negative gearing”.
It’s safe to assume there are many investors seeking solutions to their negative gearing problems or queries online. Luckily there are a few things investors can do right now to provide themselves with short-term relief.
As cash flow is the first major problem for negatively geared investors, a quick fix for this problem comes in the form of smart refinancing. If your loan isn’t currently ‘interest only’, consider switching now.
While contemplating the switch to interest only, you need to review whether your current lender is competitive. The interest rate difference across the big four is over half a per cent – $1,500 a year on a $300,000 mortgage.
Right now, fixed rates are as ‘hot’ as I’ve ever seen, with some three-year rates at 4.84 per cent and one five-year rate at 5.29 per cent. Interest rates with a ‘four’ in front signal that the economy is struggling – they’re also a golden opportunity for investors to improve their cash flows.
Every negatively geared investor should be doing their math on this right now – a loan restructure can often provide instant financial relief.
Offset accounts are another relief option. Usually only available with variable rate loans, they reduce the interest charged on the loan.
Investors facing the pain of negative gearing know and understand that the ultimate solution is often to sell the property. However, a smart property adviser can reassess your situation and explain all your options on paper so you may not have to resort to selling.
Kevin Lee, Smart Property Investment, September 2013 issue
Please contact the Solid Group team to make an appointment to reassess your current investment situation on (03) 9500 8000.