FAQ 1 How to handle negatively geared property.

This is a question on the lips of many property investors. This post will point out the aspects that should be looked out when looking at handling negatively geared property.

Own a negatively geared property?

Not happy with the results you are getting?

Is the property worth less now than when you bought it?

What do you do if you are answering YES to any of the above questions.

a) If you want to own a positively geared property then you either make your property positive geared OR you get rid of it and buy a property that is either positive from the get go (direct cash cow) or can be made positive. ( indirect cash cow).

Some ways of making negatively geared property into positive. Broadly they address INCREASING rental income together with REDUCING EXPENSES and REDUCING interest paid.

Looking at reducing interest you can approach your lender to ask for a better rate.

Reducing expenses will involve examining insurance premiums , management fees and repair costs.

Increasing rental income can mean ensuring that you are charging market rent, organising your property to obtain multiple rents, changing the use of the property from long term rental to short term rental ( executive leasing and or Airbnb/Stayz leasing.

b) If you are not happy with the results then advice follows along the same lines as point a.

c) if the property is worth less now than when you bought it then you need to find out if a sale at the current value would cover your current mortgage amount. If it does then selling the property is an option. If it does not cover the mortgage amount then you can still go ahead and sell if you have sufficient available funds to cover the shortfall. Note that selling any property involves looking at the securities held against it. A property loan which is secured only by that same property is the easiest to deal with. A property which is cross securitised is more challenging and requires the services of a good mortgage broker to assist in either the release of the cross security or alternate arrangements

THERE ARE NO SILVER BULLETS – JUST A LOGICAL LOOK AT THE NUMBERS. SOMETIMES WE NEED TO ACCEPT THAT THE PROPERTY IS THE WRONG ONE AND NEEDS TO BE SOLD OFF TO IMPROVE OUR LOAN SERVICEABILITY

OPPORTUNITY COST ANALYSIS WILL ASSIST US IN THIS DECISION MAKING PROCESS. FAQ 17 WILL GUIDE YOU.

The first area that should be checked is that you have a depreciation schedule in place. This will allow you to claim a tax deduction on the depreciation of the building and plant. If the property is old then you may still have some remaining years that can be claimed. Also if there have been any extensive renovations then these also may be claim able.

Having done this it can be beneficial if instead of waiting for the end of the tax year , it is possible to apply for a withholding variation for your PAYG. The extra money released should be plugged into an offset account to reduce the loan on the investment property and thus improve the cashflow.
If an investors portfolio was really negative then the first action that would be the least disruptive and trigger minimum tax events would be to improve what they currently have. An investor could look for a better loan rate by shopping around. For example a 0.75% saving in a portfolio with loans totaling $1.25m would amount to a saving of $9,375 per year. This money could be plugged back into an offset loan to further reduce the interest debt.

Another technique is debt reduction by using chunks of equity gained through doing chunk deals as a none funding JV Partner.

NOTE THAT A LOWER LVR WILL ALWAYS MAKE A NEGATIVELY GEARED PROPERTY POSITIVE IF THE APPROPRIATE LOAN LEVEL IS ESTABLISHED

An investor could also look at the income side of the equation. Making sure that the properties are achieving the max possible rent. He should make sure that his property manager is using market rents. Rents may also improved by doing property improvements that tenants value and are willing to pay more rent for.
For example, A tenant may value an air conditioner (extra or otherwise) and be willing to pay an additional $15 per week . The cost of that air con would possibly be $1500 which if borrowed would cost approx $2 per week. The investor net gain is $13 per week. These gains are again used by the investor to retire debt
By using equity(carefully ) the investor has generated income which is assessable by his lending bank.

An alternate to using equity is to rent equipment from Radio Rentals which you then sub rent ( through increased rents) to the tenant. A TV or Dishwasher , Dryer etc. your additional rent charged being higher than your fee to Radio Rentals. Take care to note the minimum rental periods.

Multiple letting or short term letting (Airbnb or executive leasing)should also be considered. This can be by way of letting on a room by room basis (check with your local council before doing this) or providing additional accommodation on the same lot (granny flat either separate or under the same roof(again -check with your local council before doing this)

Even more lateral thinking may allow you to rent out unused shed or garage space ( with the permission of the tenant of course)

The whole thing boils down do looking at expenses and income together.

Another technique is the use of lease options. Note that this works only with properties that the investor is willing to sell.
Information on how this works can be read here:-

http://en.wikipedia.org/wiki/Lease-option

Also FAQ 33 https://uresstaging.memberhost.io/faq-33-where-can-i-find-out-more-about-vendor-finance/

Also please read this post. It has some useful insights into vendor finance and some onward links to other services

http://somersoft.com/forums/showthread.php?t=80531

Finally consider renting the property as fully furnished. The insurance needed may be higher and the management fees also higher however the rent is usually higher.

If you want to have the property as a holiday let then you need to factor in a higher vacancy rate and some expense for advertising.

Please remember that this advice is general and that you have the responsibility to consult with a professional investment advisor prior to making changes.

Michael & Sara
Ultimate Coaches

The information supplied is general only and not intended to replace professional advice. As coaches we do not provide advice on what or where to buy or to assess the suitability of a property. We advise students to perform their own due diligence when considering a property purchase and investing.