Why negatively geared landlords are going to struggle the most with reducing rents for tenants

Most landlords are already losing money on their investment, which may explain the hesitance to cut rents for struggling tenants, experts say.

Landlords who own a negatively geared property – where the rental income is not enough to cover the associated costs of owning the property, such as home loan repayments – have to personally make up the shortfall.

At tax time, the amount that landlord has lost is deducted from their income tax bill, often delivering them a windfall by way of tax return.

AMP Capital economist Shane Oliver said: “Financially it makes it more difficult for the landlord. They would be more vulnerable to rent reductions than landlords who aren’t negatively geared.”

Since the shutdown of non-essential industries and the restriction of movement due to the coronavirus outbreak, a potential rental crisis has emerged.

Renters, more likely to be on lower incomes and employed in the industries first hit by the shutdowns such as hospitality, the arts and tourism, became concerned about how they’d pay rent, and landlords became concerned about how they’d manage repayments, interest and insurance without rents coming in.

Australian Tax Office data from 2016-17 shows 58 per cent of investment properties are negatively geared.

Even with an impending tax rebate, Camberwell landlord Josh Hartwig would struggle to accommodate a rent decrease if his tenant needed it.

“If the tenant stays in there, I can continue as long as I’m at least working,” he said. “But it is going to cost me 150 bucks a week to keep the place with the tenant in there.”

Mr Hartwig’s loan was recently switched from interest-only to principal-and-interest, increasing his costs. His partner also recently had to close her Pilates studio and was on a reduced income.

He said he’d need help from the banks to be able to afford it, otherwise he may lose the investment.

Mr Hartwig was rentvesting and had already been trying to sell the unit since February, with little luck.

“If the tenants are at the bottom rung and we’re in the middle and the banks are at the top, we need all the help we can get from the top,” he said. “We’re coping at the moment and we’ll see what happens in a couple of months.

“If I get a buyer, I will sell it. Having said that, I’m not in a rush to sell it but it would make things a lot easier.”

Sydney landlord Michelle Matthews has reduced her Northern Beaches tenant’s rent because they worked in the tourism industry and had lost a lot of business.

The property isn’t negatively geared, but will be now cash-flow negative. The rent used to cover their mother’s nursing home care, but now no longer does.

To make up the difference Ms Matthew and her brothers have decided to dip into her mother’s savings to make up the difference.

“Our first decision was that we can take the reduction, mum’s estate can take a hit,” she said. “Because he’s a good tenant and because the situation is bad and none of us want to be out on the street with our families right now.

“We’re lucky we don’t have to choose between a family going onto the street and our mother’s care.”

Ms Matthews was renting herself, and wasn’t sure her landlord would offer her a decrease if she needed it.

“If it was my landlords, I’d get my ass kicked,” she said. “For me personally and this wasn’t the case for my brothers, you can’t just dehumanise tenants in this kind of way.”

But experts argue landlords who negatively gear are usually richer and are in a better position to take the financial hit.

Because these arrangements could usually be intentional, these landlords should be prepared to take a hit on their rental income, Domain economist Trent Wiltshire said.

“People that negatively gear properties are not using the rental income as an income support as such,” he said. “Mostly these people have deliberately set up their arrangements so they can reduce the amount of income tax paid.

“Landlords who negatively gear are typically high-income earners; they probably have higher savings so they should be able to deal with the rent reduction, but that’s on average, not everyone’s like that.”

City Futures Research Centre research fellow Chris Martin said this was a source of conflict between the two groups.

“The situation appears acrimonious because a relatively well-resourced group in society is, by and large, demanding that a much more precarious group continue to pay rent, out of the latter’s much-reduced incomes,” he said.

But as the coronavirus crisis deepened, situations where negatively geared landlords might have been able to easily afford to take a rent reduction would dry up as the economic crisis affected other industries, Mr Wiltshire said.

“For landlords who have lost their job or had their incomes reduced, then that rental loss may then become a problem so any further rent reduction would be tough and they wouldn’t be able to reduce their rents,” he said. “They will have to weigh up if no rent is better than less rent.

“There will be a lot of vacancies and not enough people to fill the vacancies.”

Mr Oliver agreed that the typical landlord was wealthier and should be able to absorb the loss, but said those whose job it was to manage several of their investment properties might struggle.

“There would be some people who run this as a business, with multiple properties negatively geared,” he said. “They might find themselves in a position where they can’t make the repayments.

“[But] most landlords should be able to fare OK.”

Mr Wiltshire said the land tax concessions offered probably wouldn’t be enough to offset the costs incurred on landlords taking a rent decrease, even if they had deferred their mortgage.

“But not all landlords pay land tax. So it’s limited,” he said. “There’s minimum thresholds of what your property has got to be worth.

“For apartments and units a lot would fall under that threshold.”

Mr Oliver said the mortgage relief schemes offered through lenders would also provide relief, even though the landlord might end up in a slightly worse financial position.

“At the end of the six-month period they still have to make those payments and it will extend the life of the loan,” he said. “But it’s not comparable to the financial plight of the tenant who might end up homeless.”