Are you an investor who is having trouble dealing with repayments in the current economic climate? Is Your Negative Oriented Property Worsening Your Financial Problems? Find out how to turn negative-oriented properties into positive-oriented investments.
Australian real estate investors who previously enjoyed the tax benefits of negative gears are experiencing a double whammy of the economic impact of the COVID-19 pandemic. Already shaken by a sudden drop in income as business closings threaten job security, they are now facing a new financial crisis as tenants struggle to make rental payments.
With their reduced earnings – if they are not completely wiped out – these investors are under tremendous financial pressure to have their mortgage repayments covered, prompting many to "rethink the composition of their real estate portfolio ”.
Ian Ugarte (photo), real estate investor and co-founder of Small is the New Big, recently spoke with Your Investment Property to share his thoughts on how investors should approach a depressed market, what strategies to turn to negatively properties in positively oriented investments, and what the future looks like for the housing industry in Australia.
COVID-19 and properties with negative gears: a "perfect storm"
The coronavirus pandemic has created unprecedented economic disruption in the Australian real estate market, putting many investors at an impasse.
"What we are experiencing is a" perfect storm "of confronting reduced income and job losses that cause fear and panic in the market. This is something that Australia has never seen before, "said Ugarte.
He added that investors of mom and dad with negatively oriented properties were among those who were most affected financially.
"Many had tenants who were affected by COVID-19 and who could no longer afford the rent but could stay on the property because of the rental moratorium. This left homeowners bearing the brunt of a reduction or no investment income to pay off the debt, "he said.
Ugarte also said that there were cases where visa tenants had to suddenly leave the country due to the epidemic, leaving some properties vacant.
"Faced with their own professional uncertainty, mom and dad investors are exposed, some unable to continue to meet their financial commitments and forced to sell, often at a considerably reduced price," he explained.
Transformation of negative orientation properties into positive orientation investments
Ugarte explained that rethinking has never been more important to investors in financial difficulty in these difficult times, but stressed that "selling in a depressed real estate market has never been so important." was a good idea. "
He defined a range of options that investors have beyond the sale of the property, including discussing with banks the reduction of payments from repayment of principal and interest to repayments of Interest only, and looking for a more competitive lender and refinancing their loans.
Ugarte also advised investors to review their insurance needs, ask for premium relief from insurers and negotiate with agents to reduce short-term rental costs.
He added that "the integration of cohabitation strategies such as micro-apartments on standard residential properties" was the "simplest and most affordable" way to generate positive cash flows.
"COVID-19 has highlighted the inadequacy of supply and demand for housing in Australia. Currently, 60% to 80% of people looking for accommodation are singles and couples. Unfortunately, 60% to 80% of the properties available are three, four and five bedroom homes, ”said Ugarte.
"As it stands, the majority of the affected tenants are doing everything they can to reduce their expenses – and one of their biggest expenses is their rent." They simply cannot continue to pay the old market rents, nor can they afford to pay for the luxury of the extra space and rooms they don't need or have no need. »
He explained that by dividing properties into smaller self-contained units, owners can reduce rent by one-third to one-half while earning an average of $ 300 to $ 900 per week "more than the neighboring rental ”.
"In reality, the only way to sustain your investment so that you can resist some market volatility is to make it adaptable," said Ugarte.
"Properties that are truly adaptable can meet the needs of one type of tenant one day and another type of tenant the next day, ensuring that your property can always meet rental demand. "
How Can "Small is the New Big" Help Investors?
"In our hearts, the team at Small is the New Big is committed to changing housing policy in Australia to tackle the growing problem of homelessness," said Ugarte.
He said it was done by running educational campaigns to make sure mom and dad real estate investors made informed choices and understood the "full range of options" available to them.
The team also helps guide investors who wish to buy a new property, convert an existing property or, for those who cannot afford to buy a property yet, adopt their strategy. of "rentrapreneur".
Ugarte said he also has a "buying agency" specializing in the supply and construction of positive properties for investors with a gross return of 8% to 11%. The system allows investors to be completely "offensive" throughout the process.
What awaits us for the Australian real estate market
Ugarte said the country's housing market is set to boom after suffering a major setback.
"I am optimistic about the rebound in the real estate market, whether in the form of a short-term" V "-shaped recovery or a" W "-shaped recovery if we let's get a second wave of COVID-19, "he said.
Ugarte predicted that the current decline in the housing market will be followed by a slight increase and then another small decline before finally increasing towards the end of 2021, when he expects to " see one of the biggest years of real estate cycles "in almost two decades.
"But right now, you expect the median price of most properties to drop because the only real movement is that of sellers who desperately want to sell," he said.
