Why negative gearing is DEAD thanks to APRA and the banks...

Expert Advice with Simon Buckingham 24/07/2018

During the last election, many investors fretted that - if Labor was elected - Bill Shorten would introduce policies to increase capital gains tax and abolish negative gearing.

Labor was unsuccessful at the last election - but this doesn't mean that negative gearing is off the chopping block. It's still very much a live issue, and likely to be contested again at the next election.

But the "death" of negative gearing may have ALREADY occurred - without any direct action by the political left wing …thanks instead to the actions of finance industry regulator APRA and the banks.

Over the last three years there have been significant changes in the Australian lending environment.

Chief amongst these changes are new "loan servicing" tests forced on the banks, and a tightening of loan qualification criteria by the banks themselves.

These changes directly affect YOU - and how much you can borrow to invest. And they directly impact the effectiveness of long-term negative gearing as an investment strategy. 

For instance, did you know that even though your bank might offer an interest rate as low as 3.5%, most lenders will assess your ability to afford the loan as if you were paying 7% or more (i.e. double some of the lowest interest rates currently available)?

Most lenders have also abolished negative gearing tax breaks from the calculations they use to assess how much you can borrow. So any tax refund you might get from negative gearing now counts for NOTHING in the eyes of the bank.

If you're attempting to build a property portfolio through negative gearing, then these changes mean you'll run out of borrowing capacity - and run into a hard financial brick wall - far quicker than you might have previously.

And these new lending rules aren't going away any time soon (even without the added focus on responsible lending from the Financial Services Royal Commission).

Therefore, if you want to build a multi-property portfolio, negative gearing for long-term growth won't get you there. You'll simply run out of borrowing ability before you can accumulate enough property, because of the negative gearing "drain" and today’s higher servicing tests.

Combine this with ongoing political pressure to scrap the tax benefits, throw in a slowing property market in many parts of the country, and you have a recipe that makes negative gearing one of the riskiest (and potentially least effective) strategies you could employ in your property investing today!

So what’s the alternative? 

Fortunately there are property investing strategies better suited to current financial and market conditions, that offer investors opportunities to profit and build their wealth. Strategies like investing for positive cash flow (the exact opposite of negative gearing); adding value through renovation, subdivision or property development to effectively “create your own capital growth”; and simply being smart about selecting areas that are primed for growth in the short-medium term ,rather than investing randomly and hoping the value of your property will go up faster over the uncertain long term than what it costs to hold.

It's time to evolve, face the new market and finance realities, or risk becoming extinct like a property investing dinosaur.

Those who recognise the changes, and take immediate steps to change their investing approach, will become the new dominant species in the new property market.

This is why, at our upcoming free in-depth property investing workshops, the team of expert mentors from Results Mentoring and I will be training attendees on strategies and practical techniques to employ in this new world to build your portfolio and profit while other less sophisticated investors are left behind.

Hope to see you there!

...........................................................................

Simon Buckingham is Director of Results Mentoring and a highly experienced investor. Simon has been investing in property for over 15 years using a broad range of strategies including positive cash flow, renovations, property development and commercial properties, both within Australia and overseas.

Holding university degrees in Commerce and Law, and with over 10 years' experience as a business consultant, Simon turned his back on corporate life forever following the births of his two children and now spends his time investing, developing property, supporting multiple charities, and building businesses - while teaching others how they can do the same. He has personally coached hundreds of investors in techniques that can be used to profit from property in any market conditions, regularly facilitates public workshops and provides other free resources for property investors through ResultsMentoring.com, and has presented to thousands of people at property conferences and seminars around Australia and New Zealand.

Simon writes the highly regarded Sophisticated Property Investor e-newsletter and his opinions on the property market and real-world investing strategies have featured in Your Investment Property magazine, Smart Property Investment, Channel7 News at 6, Kevin Turner's Real Estate Talk, and Property Observer. He is co-author of the critically acclaimed property book The Real Deal: Property Invest Your Way to Financial Freedom, and a founding Mentor in Australia's award-winning personal mentoring service for property investors: the RESULTS Mentoring Program.

Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.