There’s a cohort of home and property investment owners in Sydney and Melbourne today who bought at the top of the market, which was around mid-year 2017 for Sydney and late 2017 for Melbourne.
If you’re in this boat, I understand your disappointment in terms of timing but please don’t despair. No one can pick the top – and that includes me, and I’ve been around in real estate for 35 years!
Unfortunately, in boom markets, there will always be people who happen to exchange at the peak but try to remember you are one of many – thousands of people did the same thing. What’s important now is for you not to panic and to look at the situation objectively.
If you’re an owner-occupier, stop worrying. You have a new home to enjoy for as long as you can afford your payments in what continues to be a low interest rate environment.
If the capital value of your home has come back a bit, it doesn’t matter because you’re going to be there long term and prices will eventually rise again.
If you’re an investor, you’ve bought for different reasons but the time period should be the same – always long term. No investor likes to lose money or see the value of their asset go down. It’s not pretty to watch but you’ve got to hang in there.
All that has changed is the amount of time your asset needs to bear fruit. We’re in the winter period now but the sun will come out again. Whether you invest in shares, managed funds, property or any other asset class, there are always going to be highs and lows. Smart investors ride out the lows.
Don’t feel compelled to get out. It won’t take long for Sydney and Melbourne to rebound. These are two major international cities with many unique factors keeping property prices strong. You just have to be patient while the magic of capital growth takes effect.
As I said in my column last week, I think the worst is already over. There have been 5%-10% declines in values this year and we might see another 5%-7% in some areas. After that, there will either be a steady period of market stability or even a small positive rebound by a few per cent.
If you bought at the top and you’re negatively geared, there’s a few things you can do to keep your cash flow healthy:
1. Watch your tax deductions like a hawk. Many property investors short change themselves by claiming less back from the taxman than they are entitled to. Pretty much every expense is tax deductible or depreciable so keep every single receipt! So make sure you get good tax advice on this.
2. If your investment property is new, you’re entitled to depreciation benefits and these can be substantial, so get a quantity surveyor to compile a tax depreciation schedule. It will tell you how much money you can claim every year.
3. If you’re negatively geared, you don’t have to wait until the end of the year to claim your tax back. Say your property returns a loss of $10,000 pa; and your salary is $90,000. This makes your estimated taxable income $80,000. You can apply for a PAYG Withholding Variation to have your withholding rate recalculated based on this. You’ll have more money in your pay packet each period, which you can use immediately to pay the costs of owning the property.
Finally, whether you’re an owner/occupier or investor, it would be a good idea to put some spare money into your loan or an offset account while interest rates remain this low.
Many people panic when they’re negatively geared, with no capital growth on the horizon and interest rates going up. This is a situation that could very well eventuate in the next few years, so get yourself mentally prepared now to wait it out. Long term, you’ll be glad you hung in there.
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