Is being a landlord profitable? Depends on your economic situation

As rents and interest rates rise in lockstep, what happens to the rental market? You can imagine either outcome: landlords love the high rents and rent out more properties, or they fear the high-interest repayments and get out altogether.

Both are possible, of course, with indebted property owners getting out of the game while others with plenty of cash pay down their debts to stay in the market. Equally, some may be quietly pleased with high-interest repayments and their losses on rental properties because they can claim higher deductions from their income. They call this negative gearing.

The question of landlord profits is one we need to understand. Is being a landlord profitable? The ATO puts out the statistics each year that let us answer the question. The answer is: yes — for some!

As the chart below shows, running a rental property profitably is a strategy most used by landlords on lower incomes. Whereas making a loss — and deducting that loss from your income — is often used by people on higher incomes.

The chart shows that 1% of fast-food cooks claim rental profits and losses on their tax, and they make, on average, a small profit. Meanwhile, 42% of surgeons claim rental profits or losses on their tax, and they make, on average, a big loss.

More dots are below the zero line than above, suggesting most occupations run their rental properties at a loss.

There’s one big exception. The biggest circle on the chart is for “Occupation blank”. That will include a few miscellaneous stragglers, but its biggest component is retirees. This group is very large and highly likely to own a rental property, with 21% claiming rental profits or losses on tax. It is not a group with high taxable income, so it makes sense it chooses to run properties at a profit.

If you’re a surgeon making $400,000 a year, every dollar you lose on your rental property saves you 45 cents in tax. But if you’re a retiree making $40,000, every dollar you lose on a rental property saves you just 15 cents in tax. Both groups still lose money by running their rental at a loss, but the loss is mitigated much more for high earners. They usually absorb the loss by gaining on the capital value of the home.

Pensioner landlords

Retirees are less likely to have rental interest costs because they’ve been around longer and have paid off their properties. The lack of mortgage means they run their rentals at a profit, and also means they won’t be affected by the recent rate rises that have sent mortgage repayments into the stratosphere for younger families.

As the next chart shows, retirees don’t have exclusive domain over running a rental property at a profit. Lots of occupations do. The chart shows the top 30 occupations for declaring rental income, and in each category, there are loss-makers and profit-makers.

The latest official statistics show lending for investment properties is growing faster than lending for first-home buying. But that doesn’t necessarily mean a net increase in rental properties. If the sales pipeline is comprised more of rental properties than owner-occupiers, the fact more investors are buying could just show investment properties are moving from one landlord to another.

Rents, meanwhile, are still rising, up 6.3% over the year to May 2023 and rapidly becoming the most significant item in the CPI releases. Renters are in a very tough position, and if landlords with a desire to profit from their rental properties are on the rise, that position could get even tougher.

This article was first published by Crikey.