Property investors turn to positive gearing to build wealth after budget

ANALYSIS

Property investors may be feeling a little down in the dumps since the federal budget was announced.

But you can still make money from property, without being affected by Labor’s tax changes, by thinking positive!

By that, I mean positive gearing.

See, the budget changes affected people wanting to buy negatively geared homes to reduce payable income tax, while benefiting from long term capital gains.

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The practice of negative gearing will no longer be allowed except for new properties, while those long term capital gains will now be taxed more heavily. No more 50 per cent discount.

Positive gearing means you earn more in rental income than you have to pay in loan repayments, insurance, strata, rates and any other costs associated with holding property.

Eventually, the loan will be paid off and the property will go on paying you a rental income, without ever needing to be sold. And if you don’t sell it, you don’t pay capital gains tax (CGT).

In theory, you can repeat the process by using equity from value gained by your asset as a deposit for a second property. Keep positive gearing and you can expand your portfolio, creating further income streams and building wealth that can be passed on to future generations.

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The investors you read about with 100 or more properties have all used positive gearing. They are able to keep getting loans approved because they are not being personally put out of pocket each month, so their borrowing power isn’t affected.

We’ve extensively covered the journey of Nathan Birch, founder of B Invested, who began investing in Sydney’s western suburbs just after the turn of the millennium.

Birch’s strategy was to save a deposit, buy a house on the affordable fringes of the city, where strong rental demand meant a positive return. The next move was to add value through a minor, superficial renovation, before having the property revalued with a bank.

He then used the increase in equity as a deposit for the next house and went again. And then again. Rinse and repeat.

Doing this over and over allowed him to build a portfolio of multiple properties, all positively geared. Incremental rent increases tipped the balance further in his favour and allowed him to keep his borrowing power healthy.

Once he had his base portfolio ticking along, he was able to access rare opportunities, such as buying blocks of flats in North Qld, putting the apartments on separate titles and then revaluing them at a significantly higher value.

Now, with more than 300 properties, he has branched out into buying motels, shopping centres and other high yielding assets. He has an end goal of buying 10,000 properties, to provide for his family for generations to come.

We’ve also covered the likes of Birch’s one-time protege Eddie Dilleen, who has also used bulk apartment buys as a strategy in accumulating more than 100 properties of his own.

Having 100 properties means a $10 a week rent increase across the board becomes a $1000 a week payrise you can give yourself.

People like Birch think differently about property investment. His strategy won’t suit everyone and indeed may not work a second time around. Some might argue that the opportunities he built his portfolio on are no longer out there.

But it is still possible to make money without falling foul of the new tax changes.

Of course, positive gearing works the opposite way to negative gearing, so be aware you’ll be paying more income tax each year. You may even go up into a higher tax bracket.

If you want to strike the perfect balance, it could be that ‘the feeling’s neutral’.

A neutrally geared investment covers its costs with little to no extra tax paid.

Like all strategies, positive gearing has its pros and cons, so due diligence is a must.