How to protect your letting pool from the threat of changing laws

Capital gains tax reform is at the forefront of the Federal Government’s policy agenda.

Whether the changes occur or not, the government has shown an appetite to change laws around property investment in Australia, and it’s a powerful warning for the Management and Letting Rights industry. With a housing crisis in Australia right now and the threat of law changes targeting property investors, it has never been more important for Residential Managers to protect, defend and grow their letting pools. Crucial to this is for you to have good relationships with your unit-owner clients so you can be involved in any sales process.

Losing units from the letting pool can lead to a reduction in the value of your business. Don’t be asleep at the wheel if the laws change. What the federal government is proposing will put some brakes on investor-owners. If they are deterred from buying rental units it will certainly have an effect on letting pools if those units are sold to owner-occupiers rather than other investors.

The MLR operator needs to be in a strong position to market those units to investors rather than owner occupiers. There’s a proven marketing adage that says it costs five times more to obtain a new customer than it does to keep an existing one. It’s crucial to remember that maxim in the MLR industry.

Australia has been suffering a housing crisis for many years. The capital gains tax (CGT) discount was
introduced to encourage long-term investment and risk-taking so that there would be a large supply of rental accommodation. One of the dangers of CGT reform if/when it occurs is that renters, rather than investors, will suffer the most because without incentives for investors to buy rental properties, supply will shrink and drive rents even higher.
If MLR operators are not prepared to react proactively to possible future law changes, then they will lose units out of their letting pool, which according to a recent ARAMA Members survey features highly as a threat to the profitability of their business.

So it’s vital that Residential Managers to have a full real estate licence without restrictions in place, which
enables the operator to ensure that they are involved with the sales of units in their scheme and that you make sure you’ve got good relations with your owner-clients.
ARAMA delivers the “ARM” (ARAMA Relationship Masterclass) workshops throughout the year. The ARAMA resource library features “Community Connect Toolkit” which is also supported by a webinar. Both of these industry specific resources are designed to improve and maintain the relationship between ARAMA Members and their lot owner clients.

Improved client relationships help the Residential Manager maintain positive influence with their clients, which may involve influence over the composition of the letting pool. Valuers will tell you that “certainty = value”. So even speculating about ill-conceived legislative reform can
have an adverse impact on value.

Alex McCowan from Accom Valuers sees the danger to letting pools if owners start selling off their units to invest in other asset classes such as the stock market if proposed law changes go ahead. “If law changes cause the sale of units on a wholesale basis, it would have ramifications because there would be less units in the pool and less income for the business,” Alex said. “The values of the MLR businesses would drop.

“But if MLR managers have a good relationship with the unit owners then ideally they will be in a position to help them sell to other investors. “Any changes to negative gearing and capital gains laws will put more pressure on managers to be more involved in their business, and that would not be a bad thing.

“Negative gearing laws were designed to stimulate investors into the market. If changes are made to negative gearing a lot of investors will simply leave the property market meaning there will be less properties for rent. Or they will try to make their properties cash positive and raise rents and that’s not what the government wants. That becomes counterproductive.

The term Unintended Consequences comes to mind.

Tony Rossiter, a leading MLR accountant & taxation expert from Holmans, says that any measure the
government takes that reduces the current incentives for investors to invest in property will reduce the number of people investing in property.

“In isolation that would have a negative impact on management rights, which builds its business model on managing property on behalf of many investors,’ Tony said. “But I would say it’s somewhat of a double-edged sword in that, on the flip side, any investors currently invested in property and in a management rights context are more likely to hold on to their investments, particularly if the new proposed rules are grandfathered, so that existing investors continue to enjoy the benefits of the current legislation.

“Those existing investors would be disincentivised to sell and lose those benefits going forward. “So, I think on balance there’s a definite positive from that aspect, but also a significant negative in terms of new investors coming into the market.”

This last point, in ARAMAs opinion reinforces the importance of Residential Managers maintaining positive relationships with their clients and ensuring that they positively connect with their community of lot owner clients. Cameron Wicking, from Mike Phipps Finance, says the removal of negative gearing benefits for property investors across the board would make all property investment less attractive and that would “probably mean a strong sale of investment properties, and, potentially, a significant reduction in the size of letting pools.” “Even if the legislators were to grandfather the laws for existing investors, they would get the benefit, but a new buyer wouldn't,” Cameron said. “That would certainly mean those assets would be more attractive to existing investors and that could actually protect a letting pool because current investor owners would be discinclined to sell. This in ARAMAs opinon makes it even more vital to ensure that positive relationships with existing lot owner
clients are maintained.

“Looking at letting pools moving forward, though, if the government was to get rid of negative gearing, the investor pools would likely drop significantly over time unless there’s some other commercial benefit to investors to own property. “That could mean them charging significantly higher rents to offset not being able to negatively gear a property.” This will put even more opward pressure on rents.

“So many Australians have their nest eggs and retirement plans in property investment so I think it’ll take a pretty gutsy government to make any changes to laws around that.” If the goivernment does change those laws, MLR operators will need to be ready. It’s a crucial issue. As mentioned earlier in this story, ARAMA has many resources on our website to help members protect, defend and grow their letting pools. And that very subject will be the topic of our July Expo in Southeast Queensland. This will be backed up by a free members webinar available Nationally. Both of these events will be eligible for CPD in Queensland.

The threat of possible changes to negative gearing and capital gains tax laws come as vacancy rates across the country are at all-time lows and there is more agitation than ever from outside real estate agents trying to take advantage of the situation. Outside agents poaching business from onsite managers has always been an issue in the MLR Industry, but the housing crisis has created even more dangers. Because of rises in property values, more and more unit owners are selling to owner-occupiers, which immediately takes that property out of a manager’s letting pool. An outside agent does not care who they sell the unit to… however a Residential Manager should.

Investors are looking at the bottom line with much sharper eyes these days and they are putting pressure on many Residential Managers to increase weekly rents, sometimes by hundreds of dollars. And if the manager doesn’t get that rent increase, some investors are taking their business elsewhere.

The resident manager is now the ham in the sandwich between the landlord wanting more money and the tenant having a tough time paying. It beggars belief that some investors still bypass onsite Residential
Managers – a person on the doorstep of their property and who knows the building back to front – in favour of an outside real estate agent who has no real knowledge of the community at that complex, and more than likely has to put the address of the property into their GPS to find out where it is. ARAMA has always encouraged resident managers to build the best possible relationships with all stakeholders and in this particular case with their investors and tenants so that the resident manager is always the preferred choice when it comes to managing the investment.

Residential Managers must do everything they can to galvanise the letting pool against outside agents. In the words of founding director of RAAS – Mike Butler, “Keep those barbarians outside the gates”.

You should work as if someone was plotting 24-7 to take everything you have – because they are. You should obtain your full real estate licence so you can sell units within your complex and you should call your investor owners regularly for a quick chat about the property, about their expectations – about what is important to them.

You should also let them know everything you do that goes above and beyond your caretaking and letting agreements via regular newsletters. Residential Managers can also build bonds by hosting community events in their complex such as regular BBQs or Christmas get-togethers for their owner occupier clients because you never know when they are going to sell and you want them to tell you first.

It’s never been more important for Residential Managers to do their job well. That’s the best way for managers to impress an investor. Nowadays though it is not enough just to do your job, you should be seen to be doing your job which is where the “Community Connect Toolkit” comes in handy. Regardless of what the government does with property laws, doing a great job for your clients is the best possible way a Residential Manager can protect, defend and grow their letting pool and protect your business if/when the Government decides to change the rules mid game.

Author: Trevor Rawnsley