How to know if your investment property is no longer profitable

It’s only been three decades since women were first allowed to apply for mortgages on their own, and in that time more women have become homeowners than men. ABS data from 2017 showed that 60% of women owned the house they live in compared to 56% of men, and this is set to continue to be the case moving forward. Of the non-couple first home buyers in 2017, 58% of them were women, according to a survey by Mortgage Choice.

While buying a home to live in is still the most common reason for buying, property investment remains an ever-popular choice for Aussie home buyers. And according to Westpac research in 2017, it’s women again who are the trendsetters. with 16% of women considering investing in property in the next five years compared to 13% of men.

For some, property investment can be a good way to generate long-term returns. According to ASX data from 2018, Australian residential investment properties have averaged returns of 8% p.a. and 10% p.a. over the past 10 and 20 years respectively. But amid falling house prices in various parts of the country and the possible introduction of game-changing legislative changes in the near future, there is much debate in the industry at the moment as to whether property investment remains a solid strategy.

So if you do decide to invest in property, it pays to know how your investment property could become unprofitable.

HOW YOU CAN LOSE MONEY ON AN INVESTMENT PROPERTY

To work out if your investment property is losing money, just look at your rental income and subtract the expenses you’re paying just to own and maintain the property. These expenses might include:

– Interest and fees on the home loan
– Maintenance (cleaning, gardening, pest control, insurance etc.)
– Repairs
– Body corporate fees
– Council rates and taxes
– Landlord insurance

So if you generate $2,500 a month in rental income, but your total monthly expenses are $3,100 – you’re making a $600 per month loss on that property.

More than 60% of Australia’s two million property investors claimed a net loss for the 2015/16 financial year, according to ATO data. The average net rental loss for these investors that financial year was just shy of $9,000.

LOSING MONEY DOESN’T MEAN UNPROFITABLE

Losing money in the short-term doesn’t mean you should pack it up and sell. For starters, the ATO states that rental property expenses are tax deductible. Furthermore, both the value of the property itself and the median rental income in that area can increase, meaning you can charge a higher price for rent in the future and potentially sell the house for much more than you bought it for.

An investment property becomes unprofitable when there’s no real chance of you actually selling the property for a profit, which can be very tough to gauge. You can get a property valuation done to find out roughly how much your property is worth, but don’t rely on these too much.

If there’s a strong likelihood of capital growth on your property in the near future, it might be worth holding onto for the time being. But if your property’s value has consistently fallen over a few years and shows no signs of turning around, you might consider cutting your losses and selling.

Your investment property being unprofitable might not be a problem if you plan on living in the house after you’ve finished renting it out. Each property is different, so you might want to consider asking a financial advisor to get their advice.

WHAT ABOUT NEGATIVE GEARING?

Negative gearing is a popular tax minimisation strategy among investors – when your income is less than the property’s expenses, you can reduce your taxable income which, in turn, reduces the amount of tax you pay. Positive gearing, by comparison, is when your income is greater than your expenses and will require you to pay tax on your rental profits.

But a tax break can’t save you from a poorly performing investment property despite what you might have heard – you’re still losing money. Plus, relying on negative gearing leaves you at the mercy of our politicians. Labor leader Bill Shorten has promised a major shake-up of both negative gearing and capital gains tax breaks (if elected) to come into effect as late as mid-2020, where negative gearing will end entirely for all except new homes. This isn’t set in stone however, so who knows what might happen. But the removal of negative gearing could be quite harmful to a lot of property investors.