7 REASONS WHY INVESTORS NEED CASH FLOW NOW, MORE THAN EVER

This week, the term 'negative gearing' has dominated Australian media discussions, prompted by the latest Treasury tax expenditure report revealing that the costs associated with owning and maintaining investment properties have soared to $27 billion. This figure highlights a significant governmental concern and, more critically, represents an average loss of $12,053 per investor among the 2.2 million property investors in Australia.

This trend underscores a pivotal shift in the property investment sector from prioritising both cash flow and capital gains to a more singular focus on capital appreciation due to increased expenses and reduced rental incomes. Despite rising property values, those grappling with mortgages, debts, and saving for retirement find little solace in capital gains alone.

Now, more than ever, cash flow is essential for Australian property investors.

1. Tax Deductions and Expenses Surge by 58%. The latest Treasury tax report unveils a 58% increase in property maintenance and financing costs, jumping to $27.1 billion in 2023-24 from $17.1 billion just three years prior. This rise places a heavy burden on investors, who are now navigating higher interest rates and maintenance costs, underscoring the importance of tax deductions as a mitigating factor.

2. Rental Increases Outpace Capital Gains. For the first time in a decade, rental price increases (8.3%) have surpassed capital gains (8.1%), without a concurrent drop in property values. This trend indicates a growing mismatch between property prices and rental incomes, where higher rents often result from landlords attempting to cover increased taxes, maintenance, and interest rates, leading to a no-win situation for investors.

3. Rental Yields Are Dwindling. Despite surging rental prices, the average gross rental yield has decreased to a mere 3.7%, as rising costs consume investor returns. With the average variable interest rate on new property investment loans standing at 6.5%, investors face a challenging scenario where borrowing costs overshadow potential returns.

4. Over 57% of Portfolios Negatively Geared: A significant 57.6% of investors now report their portfolios as negatively geared, a stark increase from 30% in 2022. Although tax benefits from negative gearing can offset financial losses, the ultimate goal of wealth accumulation becomes untenable when continuously losing money. “Seeing the majority of property investors in the red is astounding,” remarks APFG CEO Matt Sully. “Negative gearing, despite its tax advantages, fails as a wealth-building strategy. The smarter approach lies in identifying cash-flow positive properties and leveraging deductions for depreciation, insurance, and management to maximise returns.”

5. Living Costs Outstrip Inflation. The past year saw living costs for the average Australian jump by 9.6%, outpacing inflation. This spike is partly due to mortgage interest charges, which rose by 40.3% over the year, exacerbating financial pressures for everyday Australians. “If you didn't receive at least a 10% salary increase last year, you effectively took a pay cut,” states Matt.

6. The Next Five Years Could Be Challenging. According to Forbes, economic recovery is expected to be slow, with Deloitte economists forecasting nearly a decade until normalisation. This prolonged financial strain underscores the necessity of generating additional income through investments like cash-flow positive properties, offering a financial cushion during tough times.

7. Over $10 Trillion Locked in Housing. Australia's massive $10.3 trillion residential market, boasting $8.1 trillion in equity, presents a wealth of untapped potential. Smart equity release strategies can transform this dormant equity into active income, aiding in debt repayment, income enhancement, and retirement savings.

Cash Flow is Paramount

The landscape of the Australian property market has fundamentally changed. With rental yields and capital growth becoming less reliable, properties are increasingly viewed as liabilities rather than assets. Cash-flow positive properties, however, can change this narrative, providing immediate and sustainable income.

“At APFG, starting with a guaranteed 8% return, our Bali investments not only offer higher returns but also serve as a strategic buffer against the financial challenges facing Australians," says Matt, emphasising the necessity for professional guidance in securing the right investments for robust wealth creation.