Don’t Get Suckered into Negative Gearing
You’re a wise and knowledgeable investor. You work hard for your money and only want the safest returns possible. You’ve decided to invest your hard earned money into real estate. Sounds like a good idea! However, you must ask yourself, “did I do my math properly?”. If not, you just might have set yourself up for a negative gearing nightmare!
Now while brick and mortar purchases can be a sound investment sometimes these investments can prove to be real money pits. The trick is to know what pitfalls exist before you fall down the well.
Negative gearing is when a person has a loan on real estate (or some other investment) on where the loan payment amount is greater than the rents received. In the past, real estate professionals and other investment guru types would tout the benefits of having a negatively geared property. The main premise was that you would save a bunch of money on taxes.
The problem with this logic is that for any normal, middle-class person, there is simply no need to avoid taxation in this way. In most places, having to pay taxes means you actually made money. This is the first and foremost goal – not to lose money on an investment transaction. Once that hurdle is cleared, then we can start looking for legal ways to shelter the income from taxation.
But going in the door with the idea that “I’m going to lose money on this–Yay!!” is a recipe for long-term financial heartache and disaster.
Now if you ever find yourself in this kind of pickle the following options may be worth considering:
Sell the property and bail yourself out of at least the debt. Most property owners in this situation are already in a bind. Cut your losses and get out of the debt. You may be iffy when it comes to parting with your nest egg, but selling is the smartest option if you are in over your head. Furthermore, if you do take the plunge and sell the house, offer it to your tenant first. Afterall, they have helped you with the investment, so it seems like the right thing to do.
Try to raise the rent
If you went in for a floating rate on the loan itself, then you might consider raising the rent on the property in question. While many tenants may leave, you are sure to find one willing to pay the rent set, especially if the property is in a desirable area. If you do decide to raise the rent, you should exercise caution and consult your tenancy agreement before making the move to up the rent.
Offset the property expenses
Now, this idea ties into the raising of the rent. Most landlords will pay the utilities and just collect the rent, however, these are landlords who are not in your position. Consider having your tenant pay all expenses on the property to ease your own financial burden.
Consider an investor
If you really want to hang on to the investment, but you just can’t see a way out of the hole then you should consider bringing in an investor. Some are put off by the idea as they are afraid of losing control. If you are one of these people, then don’t fret because you can negotiate whatever terms you see fit. For example, you could have the investor come in with the proviso that you maintain majority share, but they get some sort of return over X amount of time and money invested.
Make sure you find any tax deduction you can!
Tax time is Christmas to the self-employed! With depreciation and home office write-offs, tax time can also be your time to make lemonade from lemons. Now if you are serious about getting as much as you can back from the tax man, then consult a tax accountant and tell them to leave no stone unturned.
Mileage, auto repairs, phone calls and time spent to “run the property” are always great places to start when looking for deductions. So much the better if you planned tax-advantaged home improvements like adding solar panels or energy efficient windows.
So those are a few of the options to see you through a rough patch in your investing, consider some of the options above. Also remember it is important to set the rent amount at least what the loan amount is, otherwise you could be stuck in the investment well beyond the 30-year mark. Real Estate is a wise investment, so long as you cover your basis and do not borrow against the investment unless you know you can make the return before the interest bites into your profits.