Specific risks facing property investors at the moment and 4 tactics to mitigate them

Investopoly

Significantly tighter credit, the potential abolition of negative gearing and increase in the capital gains tax rate, falling property prices, new apartment supply... these are some of the head winds facing property investors today. Given these challenges should you give up and not invest in property? I don't think so. In fact, good investment opportunities tend to reveal themselves during times where there is negative sentiment and/or uncertainly. I would like to share with you four tactics that you can employ to mitigate many of the above risks and ultimately enjoy quality long-term returns. Tactic 1: Invest with owner-occupiers It is prudent to invest in a location and type of property that suits owner-occupiers equally as well (if not better) than investors. By doing so you increase your pool of prospective purchasers which will help drive property price appreciation. Also, if future changes in tax legislation negatively impact investor demand, the owner-occupier market will still underpin demand for your investment property. The chart below from CoreLogic (from 2016) sets out the percentage of units and houses owned by investors. Most inner-city high-rise residential towers are often marketed to investors and due to the sheer quantity of these apartment towers, they are probably responsible for skewing the percentages somewhat. However, this sector is a good example of one that you must avoid like the plague - for lots of reasons including that fact that this it is dominated by investors. Chart: https://www.prosolution.com.au/wp-content/uploads/2018/09/Corelogic-units-v-houses.png Tactic 2: Invest before 2020 The Shorten government has stated that its ban on negative gearing and higher capital gains tax rate will only apply to properties that are purchased after a yet to be determined date. That is, these new rules will not apply retrospectively to property you already own. Assuming the election occurs in May 2019, I expect that it will take at least one year to draft and pass legislation. As such, perhaps the earliest practical start date for these new tax rules would be 1 July 2020. Therefore, if you purchase an investment property before this date you will still enjoy the current negative gearing benefits and 50% capital gains tax discount. Tactic 3: Level up on quality As discussed in my recent article in The Australian newspaper, if the ALP's tax policies are implemented as proposed, they will reduce the after-tax long-term return on property by 26% from 12.6% p.a. to 9.3% p.a. The best way to mitigate the negative impact of higher taxes is to generate higher returns. And you cannot expect above-average returns from below average quality assets. Therefore, you absolutely must invest in the highest quality assets that you can afford. In my book, Investopoly, I talk about how notionally there are sub-grades with the class of investment-grade properties and these will have an impact on the potential investment returns that you can enjoy. I have provided and excerpt below (click to enlarge). Book: https://www.prosolution.com.au/wp-content/uploads/2018/09/investopoly-grades.png Tactic 4: future-proof your loan structure When it...