Is negative gearing still a winning strategy?
Property investors who have used negative gearing as a way to lower their tax burden are being found out in a depressed market, an expert has said.
According to Small is the New Big, bearing the brunt of a sudden dip in income, negatively geared investors are now finding it harder to service their debts, causing many to completely rethink the make-up of their property portfolios.
The current climate has seen a 37 per cent spike in enquiries about positively geared investment strategies to the property education company, with concerned investors wanting to know how to stop the “haemorrhaging”.
“What we are experiencing is a very confronting ‘perfect storm’ of reduced income and job losses, which is causing fear and panic in the marketplace. It’s something that Australia has never seen before,” explained Ian Ugarte, co-founder of Small is the New Big.
Mr Ugarte said that a rethink has never been more important for investors who are experiencing significant financial distress from circumstances beyond their control, but he advised clients not to sell at depressed prices if they can avoid it.
Further, Mr Ugarte highlighted that the market is likely to recover quickly as the economy improves post-lockdown.
“Unlike others, I’m feeling positive about the property market bouncing back, whether it be in the form of a V-shaped recovery in the short term or a W-shaped recovery should we get a second wave of COVID,” he said.
Mr Ugarte explained that the only way investors can ensure they withstand short-term volatility hits to the market is by having positively geared properties.
“Realistically, the only way to future-proof your investment so you can weather a degree of market volatility is to make investments that are positively, or at least neutrally, geared,” he said.
“We’ve helped our clients convert a negatively geared property into a positively geared one within as little as 48 hours.
“My mission is to make talk of abolishing negative gearing obsolete by creating a marketplace where investors are able to generate a positive return on their investment. Even if it’s a small return.
“That way, they’re relying less on the government to make up the shortfall by way of tax deduction, and they’re not so vulnerable to market forces when another unexpected fall in cash flow hits them.
“Tax deductions suddenly don’t look as enticing when people are faced with losing their homes,” he concluded.
Mr Ugarte and the team at Small is the New Big are hosting a positive cash flow webinar on Thursday, 21 May.
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