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How investors buy property portfolios without negative gearing

Negative gearing may be up for change, with Malcolm Turnbull warning it could lead to house prices being “smashed”, but some investors have never relied on tax breaks to build their portfolios.

Barry Woollam, 35, has a $4.5 million portfolio covering 10 properties across Queensland, Victoria and NSW. They’re all neutrally geared – his rental income is paying his portfolio off and taking no out of pocket costs.

He’s one of many more investors who will increasingly turn away from higher priced low yielding homes as politicians argue the finer details of investor taxation benefits.

Barry Woollam has actively avoided negatively gearing his properties. Photo: Daniel Munoz

Labor’s election promise is to slash negative gearing on existing properties for investors and a reduction of the Capital Gains Tax discount, while Treasury is considering a universal cap on income deductions applying to negative gearing.

A cap of $50,000 or 25 per cent of income, whichever is greater, would affect only 0.9 per cent of landlords, 2010-11 figures show.

A lower cap of $12,500 would affect 9 per cent of landlords.

As a neutrally geared investor it’s unlikely Mr Woollam, or other similar investors in the growing group of cash-flow hunting property buyers, would be affected.

“It has never been hugely negatively geared as I didn’t want it to impact on my family’s life,” Mr Woollam said.

“I want to replace my salary with cash flow and you can’t do that and negatively gear,” he said.

“With negative gearing, you make a lump sum when you sell or hope for it to become positively geared over time.”

Using renovations and value adding strategies he has managed to pull equity out of his home and other investments to fund the portfolio, now $2.55 million in total debt.

“I think there are a lot of people negatively gearing as a tax offset but I’ve got my portfolio, I’m adding value and my absolute last case scenario is to sell,” he said.

By purchasing in lower-priced areas, often seen as first home buyer locations such as Ingleburn in Sydney, he has been able to build his portfolio without affecting his day to day expenses.

Mr Woollam says he has been able to build his portfolio without affecting his day to day expenses. Photo: Daniel Munoz

Mr Woollam says he has been able to build his portfolio without affecting his day to day expenses. Photo: Daniel Munoz

In fact, the majority of investors do not rely heavily on negative gearing, Property Tax Accountants’ Shukri Barbara said.

Using a sample of 16 of his client’s tax returns, they found $318,000 in total rental losses across the properties, with a tax rate of 40 per cent. The average rental loss per client was $8000, overall working out to $3000 in tax savings per client.

negative gearing

“Many properties are jointly owned by couples,” Mr Barbara said.

“Many times the tax benefits fall when a partner has children and stays home to look after them,” he said.

But, while the year to year income might not be substantial, it may impact on lending even further, Dream Financial’s Paul Bevan said.

“Many lenders have already removed negative gearing benefits from loan serviceability calculations,” he said.

Some have also limited the amount of rental income they will accept.

“So, investors with multiple properties that are negatively geared will face severely restricted serviceability and therefore borrowing capacity,” he said.

Empower Wealth’s Ben Kingsley, chair of the Property Investment Professionals of Australia, said negative gearing “is not an investment strategy”.

“Investing in property is just like investing in shares or any other asset – you are typically investing for one of two things, capital growth or income. No one is investing to make a loss,” Mr Kingsley said.

“The idea that negative gearing is a strategy is false. Every property eventually turns positively geared, in that the income generated by the property is greater than the cost of running it,” he said.

Effectively, negative gearing assists an investors’ bottom line with cash flow.

“A lot of people are looking for income straight away, rather than looking for capital growth, so some investors do start out positively geared,” he said.

In locations with high property value, investors often need to borrow more and will find the rent falling short of their costs so often start negatively geared.

There are suburbs when homes can be bought offering positive cash flow immediately, with “probably up to 20 per cent of investors” buying neutrally or positively geared homes, he said.


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