work out your expenses if interest rates were 8%

Does any ever do this to see if you would go broke?

I'm guessing a lot seasoned investors here would be fine...

 

We would be OK if rates went to 8%. Still it would curb our lifestyle beyond what we are willing to sacrifice, hence approx half our loans are fixed between high 3s and mid 4s.

 

Not 8% by itself but, 8% rates, falling rents and non renewal of IO conditions would not be good and something I expect in the next 5 years.

 

I do. Actually, I test mine a bit higher. It's not that long ago my rates were over 9%. Only 4 or 5 years. I have not forgotten that, so I always test at higher rates and keep a cash buffer in an offset account.

 

Whilst still a major impact, a jump like this would be somewhat tempered by the increase in (or change to) negative gearing for most investors. Taxman would pay a chunk more, and if you are doing a witholding variation, not as much impact on cash flow.

 

I keep wondering about this- everybody on here is pretty much cashflow positive, but I always wonder if they are talking just for now, or also once we return to normal interest rates..
We are slightly neg, and would be heavier neg if rates were to increase.
I do wonder if the stable CF+ have been in the game a long time

 

I also tested it at a higher rate than 7% for both my IP and my home.

Basic risk management.

Currently neutral. But wouldn't be quite neutral at 9%.

 

Depends how long you have owned the property, and how much rental appreciation you've had. For recent purchases ( say the last last 2-3 years) being CF+ (after tax) at today's rates is reasonably common - particularly on newer, sub 400K properties where you get good depreciation , and where you are still accessing I/O lending at 4%ish.

Being positively geared (pre tax) is much rarer. Historically it has generally taken @ 12 -15 years to reach that point, .... although a dual occ or the addition of a granny flat would accelerate that process...

Obviously as you get into dearer properties ( say 600K +) rental yields tend to fall away / tend to plateau a bit - so its less common to be CF+ ( after tax) or neutral ( after tax) even with quite low rates and good depreciation... again though, a dual occ or adding a granny flat might speed that along a bit.

You'll find that that many here who are claiming to be CF+ aren't achieving it pre tax. They might be going close on cheapies, but in most cases they will be achieving it after tax, due to low rates and depreciation. Their pre tax positions will still be slightly CF negative in most cases...

Thats fine...no issue there , but the problem facing them is that depreciation will fade, rates appear to be rising and I/O terms are going to be tougher to renew, so I think you'll find over the next few years that many here will have trouble staying CF+ .... especially if rates rise and P&I is forced upon them.

Quick example- if an investor purchased at 400K, they'd take on 420K debt including stamp duty and closing costs. If rates reached 6% and they were forced to move to P&I , repayments would be $2518 per month, or $30,216 per annum. Add @5K for other costs and the property would be costing an investor over 35K per annum. So the investor would need @ $675 per week in rent to be CF neutral , before tax... so lets look at the reality of that. If the property was getting $400 rent today - assuming 3% rental inflation it would take approx 17.5 years to get the rent to $675. And by then of course, depreciation will be very minimal, so it wont prove very helpful for overall post tax cash flow...

Of course, 4% or 5% rental yields and rates of 5% P&I would make the whole situation far easier all around... but assuming those sorts of rental yields is dangerous when we have so many new apartments coming along in the next year or two... and assuming rates wont break 5% is also dangerous in the Trump era.

There are some here who this wont apply to, because their portfolio's are already very mature, or because they've been very effective at paying down or offsetting debt... but many here - particularly those with less mature portfolios - will likely face this reality in the next handful of years....

Yet another reason why debt reduction or income improvement are so important, moving forward. Not just because of what they can do on the offensive side of things to improve borrowing capacity in order to GROW a portfolio, but also because of what they can do on the defensive side of things, to help you HOLD onto the portfolio you already have.

 

Still positive gear at 8%.

I like cash coming in. Don't really like negative gearing. Happy to pay tax when I have lots of cash to pay it.

Just get grumpy when I get tax bills with no cash to pay it.

 

You hit the nail on the head ...just one factor is not usual ...when the problems arise many other things can also occur
Lower asset values
Lower rents
Vacancies
Principal payments
Loans not rolled over
.....all in addition to higher interest rates