Interest rate increases and Strategy

Hi everyone,

I have a question that’s been bugging me since I started educating myself on property investing. I did a bit of research on the forum but couldn’t find much specifically on this. Which probably means I’m missing a key concept or I’m concerned about something that is not important??

What strategies are you using to protect your property portfolio from rising interest rates? Will your portfolio survive if interest rates goes up to 8% for a few years?

I’m doing some Excel calculations to play around with a few investment strategies for future investing. I can get my planned portfolio to deal well with other impacts such as vacancies, maintenance costs etc. But whatever I come up with, when I start to increase the interest rates of my mortgages I run into trouble without fail! And this is with only a few properties and IO mortgages in my portfolio!! What I mean with fail is that I lose my positive cash flow and I have to start paying to keep the portfolio running each and every month. That is sustainable for a little while, but what if the interest rates stay high for a few years??

Positive cashflow only stays positive under so much pressure and the same goes for cash buffers.. The only potential way out seems to be a high LVR for each property, but not really an option for a new investor! Or if you are lucky to have a few properties by the time this happens you could sell one property to keep the others going?

How are you doing it? Am I missing a key concept here?

Thanks for the help!

 

Good thing to think about and hopefully everyone has thought about this scenario. The one thing we can all be sure of is that rates are not going to stay at these historically low level forever.

There are plenty of contingencies that you can employ if things get tougher as an example move loans from IO to P&I (lower rates).

Are you investing purely for cashflow purposes or capital growth? How does your model look with differing levels of capital growth?

If your outlook is no asset growth and negative cashflow then I think you should be considering if they are the ideal investment. A basic negative gearing strategy in essence assumes capital growth and a cashflow/operating loss with some additional benefits from depreciation.

 

The usual strategies such as fixing your rates is one option if you are really worried. When purchasing making sure you don't over stretch yourself in the first place. Always keep a money buffer back for the unknowns, that's what i do. As time passes you can also increase your rents as well which helps. I don't buy for cash flow myself as it can easily switch from positive to Negative as you have mentioned. Some investors use their equity in their portfolio to draw down on to help pay the mortgage costs.

 

Thanks Morgs. Mostly Capital Growth, but ideally getting at least neutral gearing going over into positive gearing after a few years of increased rent / growth. I totally agree that aiming for"no asset growth and negative cashflow" would not be the brightest of moves

 

I'm still new to this, but I can totally see how just aiming for cash flow would not be the best way to go. Do you generally increase your interest rates at a fix percentage each year (2%?) Or do you assess things every 6-12 months or so? Using your equity to help bridge the mortgage sound like a pretty good idea, will look into that thanks.

 

lol, I'm fortunately not expecting interest rates to go back up to 8%. I'm just attempting to do a stress test of my so called excel model and noticed that things goes a bit out of wack every time I increase interest rates too much. Interest rates are bound to go up, knowing what you can deal with is probably a good idea. Sounds like the general expectation is to not see interest rates go up to 8% and over very soon? And wow, 18% interest, can't see many of today's investors surviving that!

Any good software out there to do this kind of planning / calculations? Excel is ok, but not exactly easy to work with.

So the options so far is:

• Don't over stretch yourself when buying
• Keep a money buffer
• Use your portfolio equity to bridge the costs
• Switch to P&I to get lower interest rates
• Us fixed rate mortgages
• Make sure you increase your rent over time (to keep up with inflation and reach positive cash flow eventually if you don't have it yet)
• Don't buy property if you expect the interest rates to go up to 8%

If anyone else have options to add to the list please share!

 

@Jordaan that is a good list. Another option which is property dependend is to renovate to increase value and rental return. My best is lufting rent from $330 pw to $440 per week after a cosmetic reno.

Another is to build behind if possible. In Perth for about $220k, you shpuld be able to achieve up to an additional $500 pw rent. You need room to build though.

 

Thanks Perthguy. What do you mean with build behind? As in add a granny flat in the back yard? Or just extend the property?

 

Do you mean to increase the rents every year? If so, we can only increase the rent if the market allows it. In some cases, such as in Perth in the last few years, the rents decrease each year if the economy is declining.

 

That was a question aimed at Lawrence / forum members to find out if people generally raise rent every year...

 

Lol, software programmer actually Just aiming to learn how various changes impacts your end result & then plan a viable strategy accordingly. You mean to say you didn’t do any of this before you started your investment portfolio Rolf?