If you do not, and that is perfectly ok, then this email is not for you.
There are proposed changes to the rules for property investing, so let me guide you by pointing out the new pathways of benefit.
First and foremost, it is essential to know why you invest. Always start with the goal or endpoint in mind. (Blog: Start with the End in Mind)
My clients, who are all small investors, aim to create income in retirement and to avoid (as far as possible) being dependent on the whims of the government of the day.
As a case in point – we currently have a government that believes that anyone who holds assets somehow has an unfair advantage. And that those people need to hand over their assets to people who don’t – this is called socialism. It is a belief set, and it is the belief set of this government.
THAT is patently unfair. Some of my clients have been using the rules that previous governments put in place to encourage aspiration in those very same people to try to move themselves away from full dependency on the pension system.
The reality is that, despite the blatant lies this government told pre-election, they are in power until 2028. We as investors can only hope they are held to account for their deliberate lies by all who aspire to independence.
BUT that is the future.
My job for the now is to guide you to the least-risk pathway for creating future income, no matter who the government of the day is.
My definition of an asset is something that creates income. Income buys food in retirement; income buys holidays in retirement.
We acquire capital NOT for its own sake. we acquire capital because it creates income.
This is the definition used by Robert Kiyosaki – the author of Rich Dad Poor Dad. (If you wish to invest – you should read it.)
In the stock market, for example, all shares have a number called the Price/Earnings ratio (P/E). A share with a P/E of 5 takes 5 years of income (dividends) to pay back the money (capital) you invested.
If a business might not exist in two years – an investor might want a P/E of 2. Think a video hire business – can you even remember Video Ezy?
If a business is unlikely to fail, think CBA, NAB, Westpac, ANZ, all guaranteed by the govt, they might have P/E’s of say 25.
Risk. Reward. The investor chooses.
To take supermarkets as an example, Coles has a current P/E of 30, whereas IGA (Metcash) has a current P/E of 11. Coles is seen as more secure and creates less income, in relative terms, than IGA.
For property, there is a simple rule of thumb: a $500k purchase with $500per week rent is very close to a 5% yield. This is a P/E of 20 (100% divided by 5%).
BUT out of that rent comes running costs, body corporate fees, repairs, letting costs, and State Govt investor taxes (think Victoria especially), and the rent to the investor might halve to $250. The P/E is now 40.
This means you need to hold the property for 40 years to get your money back. That’s a long time.
Which is why investors will increase rent every time a government imposes costs on them. Someone needs to pay for an investor to provide a home to someone.
Housing is a basic need, and if government doesn’t want to own the house for a tenant, the rules for negative gearing were created as a social contract; a private investor provides the house, and the taxpayer shares in the cost.
The budget changes the rules for negative gearing and capital gains tax though.
An investor (from May 12th on) can only claim rental losses against personal income for brand-new property.
The social contract has changed. The taxpayer will only share in the cost if a new home is being created.
The alternative governments say they will revert to the previous model.
BUT all sides of politics confirm that negative gearing will apply to new builds.
You will notice I am personally less concerned about the CGT changes because I am personally investing in an asset that I wish to hold to create income.
I tend to define buying and selling for capital gain only as speculation. Each to their own, but this email is about investing to create income.
In summary, residential real estate is still a low-risk asset class to invest in. Banks will lend up to 100% to assist in the purchase.
The path forward is to invest in either house-and-land packages, often on the outer edge of cities, or town houses and units closer in.
You can still invest in existing real estate, with the proviso that any short-term losses must either be carried forward or offset against other profits in your property portfolio.
Property is still a very secure pathway to create wealth. Talk to me about how this might help you.
Alan Heath
Ask Alan Heath – Brisbane’s Trusted Mortgage Broker