5 things you can do to prepare for the negative gearing ban (and should you invest before 2020?)

The ALP announced on Friday (29/3/19) that it will ban negative gearing from 1 January 2020 if it wins the election next month. I wrote an article for The Australian newspaper over the weekend which addresses the steps property investors can take to fortify their investments (which I list below). A number of people have asked me whether they should invest in property prior to 1 January 2020. I discuss this too.We still have a long way to goOf course, the ALP has to win the election before it can ban negative gearing. I acknowledge that virtually every poll predicts an ALP victory. But John Howard didn’t poll very well leading up to his 1996 election win. And who would have thought Mr Trump would become President of the USA! So, anything can happen.Secondly, it will depend on how strong their win is and whether they have a large majority or not. If it’s a tight win, they may have to negotiate with minor parties to get its law enacted and, as a result, water down its change to negative gearing e.g. limit it rather than an outright ban.And finally, we have not seen the draft legislation yet. All the ALP has said is they will be negative gearing if people invest in established property or shares after 1 January 2020. Back in 1985 when the Hawke government banned negative gearing, people used unit trusts to invest in property. They borrowed to buy the units and as such were able to continue to negatively gear the property. So, there could be workarounds.What should (existing) property investors consider doing?There is a risk that the ban on negative gearing will put further downward pressure on property values in 2020. Owning an investment property in a falling market can be a double-whammy. Not only is your asset value falling, but you have to put your hand in your pocket each month to contribute towards the holding costs (if the net rental income isn’t enough to meet the loan repayments). Here are some of the steps you can consider taking:1. Reduce holding costs – fix your interest rateMany lenders are offering 3 years fixed rates at levels below variable interest rates, particularly if your loan repayments are structured as interest only. This may help reduce the monthly holding costs and you could still be better off on a fixed rate because, even if the RBA does cut rates this year, there’s no guarantees the banks will pass it on. See more from my blog a few week’s ago.2. Make any changes to mortgages prior to 2020If values do fall further as predicted, now might be a good time to lock in access to available equity. This involves increasing your loan’s credit limit to up to 80 percent of the current value of your investment property. This will give you access to additional credit for emergencies (i.e. a financial buffer) or future investment purposes. This equity may not be available in the future if bank valuations fall after 1 January 2020.3. Divest of underperforming properties in 2019I expect that some property types and locations will be more exposed to changes in negative gearing. For example, locations or buildings that are dominated by investor-owners could be at greater risk compared to locations with a more normalised number of owner-occupiers. In addition, the types of properties that have historically been marketed to investors primarily because of the tax benefits they generate (such as depreciation and negative gearing) will almost certainly be negatively impacted.If My new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus Do you have a question for the podcast? Email us at [email protected]. If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-servicesIf this episode resonated with you, please leave a rating on your favourite podcast platform. Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.