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Did you know the government may limit the number of properties you can negative gear?
When it comes to property, there is no need to be greedy. As in most pursuits in life, greed often results in nothing but trouble and usually comes in the form of ‘get rich quick schemes’! With property investment, this means poor property decisions and returns.
Property spruikers and the media often mislead consumers into believing that owning as many properties as possible should be the goal, and worse, that it is very achievable. Owning a very large quantity of properties makes headlines, sells newspapers, books and can lead people to the FOMO (fear of missing out) effect and a sense that there is some extravagant hidden secret that only a select group of people know about. Frankly, this idea is bull$hit with a capital $ dollar sign, and anyone who leads you to believe otherwise is peddling a story to sell you something!
In my two decades working in the property and financial advice industry, very rarely have I seen people with more than 5 properties to their name, let alone 10. And often when I have they have been asking for our help to unwind the situation because they are too highly leveraged, have purchased poor performing properties, were misguided by those selling property masquerading as ‘property advisers’.
With this in mind, we find it interesting to hear that the Treasurer, Scott Morrison, may look at limiting the amount of properties that people can negatively gear in an effort to improve housing affordability. This has the potential to stifle the ability of investors to accumulate a ridiculously high number of properties due to the limited tax benefits beyond owning a certain number of negatively geared properties. We think there is some merit in this strategy, as our philosophy has been for over a decade that you only need to own 2-5 ‘quality’ properties to set yourself up for the transition into the flexibility stage of life. This includes the family home, which is often forgotten about when talking about wealth creation through property.
We will watch with eager anticipation for any further comments or development from the government on this idea leading into the budget. ATO figures show that 90% of investors own no more than 2 properties. If the limit is set to 2 properties, only 10% of investors will be affected, and that is assuming all the remaining 10% of investment property owner have 2 of their 3 plus investment properties negatively geared currently which may not be the case. This political manoeuvring around limiting negative gearing to the number of properties, without abolishing it means the Libs will not disenfranchise nearly as many votes as Labor would with their proposed policy of completely ending negative gearing. This seems to be very intelligent politics!
It remains to be seen is the limit will be 2 negatively geared investment properties, but this seems to be the sweet spot to me! If that is the number that is selected, it does not limit ownership of negatively geared properties to 2 over your lifetime. This is because if you hold a property for long enough, eventually it will become positively geared. When an existing property become positively geared, this will be a trigger point for investors to purchase there next property. This process can take 5, 10 or 15 years depending on the specific property, its rental return, holding costs and the level of gearing.
Success in property has never been about accumulating as many assets as you possibly can. It is about determining your lifestyle goals, and ensuring that your property decisions take you closer to them.
Your lifestyle aspirations can be achieved through property in two ways:
1. purchasing property that enhances your lifestyle (EG home, holiday house)
2. purchasing property purely for a financial return
Our focus for property investment has, and will always be, quality over quantity.
All the best with your Property Planning!
David Johnston – Managing Director