Eddie Dilleen is a 33-year-old who claims to own 150 properties.
His confidence in property investing cannot be overstated.
“To me it’s definitely a no-lose game, it’s the best way to create wealth in Australia,” he says.
Mr Dilleen runs his own buyers agency, and his holdings make him one of 166 mega landlords identified by the ATO as owning 20 or more rentals in their own name during the 2022/23 tax year.
Eddie Dilleen founded his property investment firm Dilleen Property in 2016. (Supplied)
Mr Dilleen says despite amassing immense property wealth on paper, his personally held rentals run at a loss.
“The biggest thing that I would focus on would be the capital growth and the ability to take that equity out from those properties and further expand,” he says.
Cash flow “would be the last thing” Mr Dilleen says he would focus on.
It is an approach that appears shared by most of the country’s largest investors.
The ATO data, released exclusively to the ABC, shows the only investors making an average rental loss in 2022/23 were those with 19 or more property interests, both on an individual investor and individual rental basis.
The losses put mega landlords at the extreme end of a trend that swept through the rental market that year.
Rental revenues collapse
In 2022/23, profits from investor-owned rentals plummeted 73 per cent.
In dollar figures, that equated to net rental income (income after expenses) falling from almost $5.9 billion in 2021/22, to less than $1.6 billion in 2022/23.
Despite the drop, investor numbers, and the number of rentals they owned, shrank less than 1 per cent, suggesting falling rental profitability did not trigger any significant rental sell-off.
Rachel Ong ViforJ, professor of economics at Curtin University, says she was so shocked at the collapse in rental revenues, she had to check it twice.
“It’s quite astounding,” she says.
Economics professor Rachel Ong ViforJ, from Curtin University. (ABC News: Rachel Pupazzoni)
Professor Ong ViforJ put the fall in profitability down to surging interest rates, plus rising rental management and repair costs.
According to Reserve Bank figures, the average interest rate on variable-rate loans to property investors in 2022-23 was 5.7 per cent, up from 3.4 per cent in 2021-22 and just 3.5 per cent in 2020-21.
The rise put the interest paid by investors at its highest since 2018-19, when it averaged 5.89 per cent.
Although total net revenues remained positive, it was likely many rentals became loss-making that year, Professor Ong ViforJ says.
She puts the lack of a widespread landlord sell-off down to two things: negative gearing rules allowing investors whose rentals were losing money to reduce their personal tax bills, and the promise of a large payday when rentals are sold, sweetened by the 50 per cent capital gains discount.
The combination of these two tax breaks makes property investing attractive, she argues.
“The risk is very low because you’re just protected while you’re holding the property, you’re protected by the ability to negatively gear, and then when you sell up, you’re protected by the 50 per cent capital gains discount.”
The drop in rental profitability occurred despite a period of rapid rent increases, when rents jumped 7-9 per cent annually.
Tim Lawless is the chief analyst at property analytics firm Cotality. (ABC News: Geoff Kemp)
Tim Lawless, chief analyst at property analytics firm Cotality, says the significant rise in rents from mid-2020 had “very little to do” with the interest rates expenses investors were facing.
“The underlying forces of demand and supply were at play,” he says.
“A surge in rental demand, initially from smaller households and later amplified by reopened borders, ran headlong into a supply shock, providing landlords with the foundations to push rents higher.”Landlords may ‘welcome’ return of loss-making rentals
Independent economist Saul Eslake says some investors will have “welcomed” their rentals losing money in the higher interest environment.
“They wouldn’t have planned to have been positively geared during the COVID years, because that defeats the whole purpose of negative gearing, which is to reduce tax payable on other income,” he says.
The ATO data showed mega landlords with 20 or more rentals were the only group that made average losses throughout the COVID era of record-low interest rates.
Economist Saul Eslake said data released to the ABC suggested mum and dad investors were not the greatest beneficiaries of negative gearing tax breaks. (ABC News: Gregor Salmon)
Mr Eslake says this underscores the importance of negative gearing to the wealthiest investors and scuppered the argument that it was predominantly used by “mums and dads trying to get ahead”.
“To which I always ask, ahead of whom?” Mr Eslake says.Â
“The answer — their own children and grandchildren, or their children’s and grandchildren’s peers.”
Mr Eslake says other data from the ATO’s 2022/23 Taxation Statistics reinforced it was the wealthiest investors capitalising most on negative gearing rules.
“18.8 per cent of individuals in the top tax bracket report net rental losses, as opposed to just 6.3 per cent of those who are not in the top tax bracket,” he says.
Government losing billions from investor tax breaks
A Parliamentary Budget Office (PBO) analysis, prepared at the request of former Greens MP Adam Bandt, confirmed the greatest negative gearing advantage goes to the highest-earning Australians, as do benefits gained from the capital gains discount.
The PBO analysis estimates in 2025-26, the bottom 10 per cent of wage earners in Australia will get back just $152 million from these two tax breaks, while the top 10 per cent will get back over $2.9 billion.
The same analysis shows investor tax savings, and government revenue lost, from negative gearing did jump as rental returns fell.
It shows in 2022-23, negative gearing led to lost tax revenues of $3.5 billion — $1.4 billion more than the year before.
Tax loss to negative gearing ramping up rapidly
The PBO analysis predicts the amount of tax income lost to negative gearing will rise significantly in the coming years, increasing to $5.2 billion in 2023-24, $6.5 billion in 2024-25, and will keep rising to an estimated $14.1 billion per annum by 2035-36.
Australia Institute chief economist Greg Jericho says falling rental profitability in the ATO data shows negative gearing was becoming “a much more common situation” and investors are “winning both ways”.
“We’ve got a tax system that is geared towards making buying an investment property a pretty risk-free proposition,” he says.
Mr Jericho says theoretically investors shouldn’t be able to negatively gear long-term, because it means they are losing money every year.
Greg Jericho says the current tax system makes it easier to buy a home the more properties an investor has. (ABC News: Michael Barnett)
“The only reason that is now a viable option is because of the 50 per cent capital gains discount,” he argues.
“You can afford to cover those losses, and live with the rental losses for a period, reduce your overall taxable income, and then when the price of the property goes up to a worthwhile amount you can sell it and get a 50 per cent tax discount that way.”
Call to limit negative gearing to two properties
Mr Jericho says the ATO data should reignite discussions of limiting negative gearing to one or two rental properties per investor — a move that would not affect roughly 90 per cent of current investors.
The ATO data shows about 817,000 properties were held by investors with interests in three or more properties in 2022-23.
Despite this, Mr Jericho did not think limitations on negative gearing would dramatically affect house prices, as demand remained high.
“Presumably those properties would mostly go to owner-occupiers, rather than investors [if they were sold],” he says.
Mr Jericho’s call echoes those of the Australian Council of Trade Unions, and the Australian Council of Social Services, both of which are calling for bold changes to negative gearing and the capital gains tax, with the latter wanting to see the tax revenue generated by changes invested into social housing.
Property Investment Professionals of Australia (PIPA) chair Lachlan Vidler argues against changes to negative gearing, saying it would disincentivise investment, which would mean fewer rentals and reduced house building.
Mr Vidler argues it would still damage sentiment across the sector, even if the majority of investors would be unaffected.
“Considering we are in a rental crisis, the last thing we need is less rental properties on the market from investors,” he says.
Mr Vidler says Labor took negative gearing reforms to the 2019 election — an election the party lost — and voters would be shocked to see reforms back on the agenda so quickly after the recent election.
“I think there would be a lot of people out there who said, ‘If this is where it starts, where does it end?'”
In response to the added tax revenue negative gearing reforms would likely deliver, Mr Vidler questions why rises in government spending lead to discussions of who to tax more.
“Why can’t we look to be more efficient with the revenues we do create?” he argues.
How Australia’s rentals are distributed
The vast majority of investors (a little over 1.6 million) own one rental, and a little over 423,000 investors own or part-own two rentals.
Roughly one-in-10 investors own three or more but, because of the size of their portfolios, this relatively small group owns about a quarter of all rentals in the country.
There are 2,529 investors who each have interests in 10 or more properties, and this group owns or part-owns more than 32,600 rentals.
There are limitations on the ATO data — it doesn’t capture rentals held in companies and trusts, and there is the chance some commercial properties are captured by the dataset, although economists say these numbers would be small.
To estimate how many rentals and large investors the dataset might miss, the ABC contacted multiple property investment advisories.
Data from these advisories showed roughly 70-75 per cent of clients held their rentals under their personal name, while the rest held rentals in trusts, companies or self-managed super funds, suggesting the ATO data was missing up to a third of rentals.
Amanda Turner, director of Opulence Property Group, says her agency’s data suggests 73 per cent of clients own property in their personal names, with the remainder owning property in trusts. (Supplied)
Amanda Turner, director of Queensland-based investor advisory Opulence Property Group, says trusts are sometimes preferred because they protect the asset if, for example, the investor is thinking of handing property down to children.
Eddie Dilleen says he holds most of his properties in trusts and companies, meaning most would not be captured in the ATO data.
Mr Dilleen speaks at length about his own childhood growing up in public housing, and how it drove his determination to buy property.
In his opinion, those struggling to buy a first home should not hate the investors — they should hate the tax rules that made the market.
Eddie Dilleen has written a number of books on property investing. (Supplied)
However, he doesn’t think those rules should change.
“That’s just the rules of our society and government and … of how Australia works, and even other countries. Like it’s capitalism, in that regard.”
He says the key was figuring out the rules and how to take advantage of them.
“It’s always been like that, and always will be like that.”
Negative gearing was introduced in 1936, while the 50 per cent capital gains discount was introduced in 1999 and, before then, capital gains were taxed in the same way as other income, although only the “real” gain, over and above inflation, was taxed.