The good news is that there are a few simple ways to manage your investment loan repayments and the other costs owning a property so you can continue investing.
What are the costs of property investing?
One of the downsides of negative gearing is that the rental income that you earn is less than the costs of holding it.
These costs include your mortgage repayments, property insurance, water and council rates, as well as regular maintenance and unexpected repairs which you’ll need to foot the bill for.
To pay for these costs, you would have to use your cash reserves to pay for the shortfall, ultimately leaving you with less money in your pocket and, in turn, affecting your borrowing power and ability to continue building your property portfolio.
How to make the tax refund work for you
One of the big benefits of negative gearing is that you get a large tax refund when you lodge your tax return. But that doesn’t help you to pay your bills month to month!
You can lodge a form that allows them to change the tax withheld from your pay. This makes a huge difference to your cashflow.
Get a good mortgage broker on your team!
Look for a mortgage broker that not only understand lending policy but one that has experience in property investing.
They will able to assess your overall situation and tell you what you can afford right now but also stress-test several scenarios to make sure you can continue to making repayments.
This is something a bank won’t do!
If you’re using a negative gearing strategy to invest and need an investment loan, call us on 1300 889 743 or complete our freeassessment form today.
Don’t max out your borrowing capacity!
Your borrowing power is otherwise known as serviceability, which is basically the bank’s assessment of your capacity to make mortgage repayments.
Although the bank will decide whether you can afford the amount you want to borrow, it’s important to take into account your financial goals and speak to a financial professional about your future investment plans.
You don’t want to be hampered by a slim cash flow buffer, even if the banks are willing to lend you more than what you’ve budgeted for.
Choose the right mortgage structure
Your home loan repayment is undoubtedly the biggest expense you have when investing.
If you’re negatively geared by a large amount, you’re likely to feel the pinch when interest rates rise. Even a small increase could potentially push you over the edge.
One way to mitigate this is to lock in your interest rate when interest rates are low, albeit it’s difficult to predict. However, by fixing your rate, you’re able to plan your repayments so it’s a great way to manage cash flow when negative gearing.
Fix rates aren’t for everyone!
Don’t fix your home loan if:
- You’re planning to sell the property over the short-term.
- You’re planning to refinance in the near future.
- You want the flexibility of making extra repayments.
Bear in mind that if you’ve decided go variable instead, your interest rate will likely no longer be competitive after 3-5 years.
Since 2015, when the banks changed the pricing on investment loans, there’s been significant differences between lenders.
Some will give you a discount if you have your home loan with them, some charge extra for interest only repayments, and most of them are using all sorts of tricks to jack up up your interest rate once your mortgage has settled.
It’s likely that you’re paying higher interest rate than what your lender is currently offering to new borrowers!
Speak to one of our mortgage brokers and they can tell you if your current investment loan is still competitive by completing our free assessment form.
Change your rent schedule
You can ask your property manager to make payments to you fortnightly instead of monthly.
If your tenant is paying rent weekly or fortnightly this means you get access to the rent income faster rather than it sitting in your property managers trust account.
Also, have a reminder in your calendar to increase your rent.
Property managers aren’t always proactive with this and won’t have your best interests at heart.
Some people suggest small rises every 6 months while other professional investors will tell you annually. Either way, it doesn’t matter too much.
Have a worst-case scenario plan
The reality is, you cannot have a negatively geared portfolio if you have no job.
While your job security is out of your control, it’s always a good idea to work out how long it will take you to find another job with a similar salary and whether you can manage your cash flow during that time.
Have cash on standby at all times. Most people put this in an offset account but if you’re planning to buy several properties, it’s inevitable that they’ll require repairs and you may have to deal with a period of high vacancy rates.
Make sure you take every cost into account
If you don’t have a clear idea of the expenses you have to pay, you cannot plan for it.
Therefore, you need to estimate everything before buying!
This will help you get a clear picture of your income and expenses for each week as well as your potential return on investment.
Once you bought the property, make sure you keep a meticulous record of every invoice and statement concerning various costs to the property such as insurance and rates.
This will help you keep a close eye on your cash flow and immediately see if things are going pear-shaped.
Use your credit card sparingly
Even if you have a generous interest-free period, it pays to be conservative with your spending especially when negative gearing.
Avoid splurging on non-essential expenses and only spend what you can pay back in full each month.
This way, you avoid paying a hefty interest rate on your credit card bills.
Sacrifice some luxuries
You don’t need to live like a pauper but you’d be amazed at how much easier it is to manage cash flow when negative gearing when you simply drop some unnecessary expenses.
You don’t need to do it over the long term, but if you see that your cash flow is falling well into the red, it’s time to tighten your belt.
Maintain your property
You can avoid hefty repair costs by ensuring you maintain your property is well-maintained.
An initial pest and building inspection is crucial for any property purchase but, if it is an older property, keep a note of if and when floorboards, wiring, plumbing, and any other parts of the structure may need to be replaced.
Nip any problem in the bud by attending to it at the outset so they won’t become a bigger problem down the track.
You should never simply go for the cheap option when it comes to hiring a tradesman or doing the work yourself but be smart with your spending.
Having a well-maintained rental property may help you to secure better tenants and even give you credence to charge more for rent but repairs and renovations can only take that so far.
Make sure to get the right investment advice
You’ll pay a bit upfront but the amount of money you save by getting the right advice can more than cover your cost.
Like your mortgage broker, find an accountant that’s experienced in dealing with property investors.
Also, ensure that you get a depreciation schedule prepared by a professional. You’d be amazed by the amount you can claim, even if you think your property is too old.
Don’t skimp. Often times, good property investment advice provides more long-term benefit than going it alone.
The reality is, it can be difficult to manage cash flow when negative gearing and you may often feel like all of your income is going to the banks and into the property.
However, by planning ahead and adopting some of these strategies, you’ll have a better chance of onto your negatively geared property over the long term.
Do you need an investment loan to kick-start your property portfolio?
Speak with one of our expert mortgage brokers by calling 1300 889 743 or by completing our free assessment form today.