Finance advice
Interest rates and the property investor

Interest rates and the property investor

By Dave Ives

When interest rates go up, most home owners react the same way – they take a big gulp. Conversely, when interest rates drop, these same people let out a big cheer.

Now, what about most property investors? How do they react?

You’re right, they react about the same. Maybe they take a bigger gulp or let out a bigger cheer, but the reaction is generally the same.

You see, for the property investor, the results are multiplied. That can be good news or bad news. If rates go up, then the 'pain' is multiplied, hence a bigger gulp. If rates go down, then the 'joy' is multiplied, hence a bigger cheer.

What I’d like to do today is put some numbers to this 'pain' and/or 'joy'. Take a look at how interest rates affect a property investor’s cash flow.

Property investor baseline situation

Let’s say our property investor has the following situation:

• Five rental properties
• $200,000 mortgage on each property
• Each property valued at say $350,000
• 7 per cent variable interest rate
• Interest only loan
• $350 per week rental income
This should be enough information for us to make some cash flow calculations.

First, let’s calculate the weekly interest on these loans.

$200,000 x 0.07 = $14,000/year
$14,000/year x 1 year/52 weeks = $269/week per property
$269/week x 5 properties = $1,345/week

Now, let’s look at the rental margin.

$350 – $269 = $81/week
$81/week x 5 properties = $405/week

So, our investor has $405 per week left over after paying interest to the bank.

Let’s estimate the other holding costs for each property.

• Insurance, say $1,000 per year = $19/week.
• Property management = 10 per cent of rent = $350 x .10 = $35/week
• Taxes = $1,500 per year = $29/week
• Maintenance = allow 5 per cent of rent = $350 x 0.05 = $18/week

Now tally up all extra costs

$19 + $35 + $29 +$18 = $101 per week
$101/week x 5 properties = $505/week

So, based on these estimates, our property investor is out of pocket each week to the tune of $405 – $505 = $100/week.

Not exciting.

Now, let’s run the numbers for two new cases. First case is an interest rate rise. Second case is an interest rate drop. Let’s just assume a 0.5 per cent change either way.

Case 1: Interest rate rise

If interest rates rise by 0.5 per cent then our property investor is in for some “belt tightening.”

Weekly interest goes up to $1,442, that’s a $97 increase.

Assuming all the other numbers are the same, our property investor has just copped another $97 dollars in the negative each week. The cash flow has gone from negative $100 to negative $197.

Not exciting.

Case 2: Interest rate drop

What if interest rates drop by 0.5 per cent? The interest rate goes down to 6.5 per cent.

Now our property investor will get some relief. The new weekly interest payment drops to $1,250 for the five properties. That’s a saving of $95 each week.

Again, assuming all the other numbers are the same, our property investor is now in a much better financial position. The shortfall each week is only $5.

Margin, Margin, Margin

Have you ever heard the famous answer to the question, "What are the three most important aspects of property investment?"

Remember the humorous answer, "location, location, location"?

Well, I’d like to follow that up with another question, "What are the three most important aspects of property investment finance?"

And, my answer is, "margin, margin, margin".

I feel the property investor should factor in a safety margin to guard against interest rate rises. This can be in the form of fixing the rate low. Or, it can be getting rents sufficiently high. Or, reducing the debt owed. Or … (your creative idea goes here!)

As you can see from the numbers in this article, interest rates have a significant impact on cash-flow. As property investors we need to make sure we can survive the ebb and flow of interest rate tidal changes.

What safeguards have you got in place to mitigate the impact of an interest rate rise?

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About the Blogger

Dave Ives

Dave Ives

In July 2009 Dave Ives quit his job as an engineer and has been a full time property investor ever since. He is also an author of 3 books with another on the way in 2017. More of his writing can be found on ivesguy.com.

 

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  ["introtext"]=>
  string(144) "

Property investors are now able to identify and bid on auctions remotely using a new live-streaming functionality launched by Gavl.

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Called “Request an Auction”, the new functionality enables users to watch and bid on any Sydney or Melbourne auction remotely.

Through Gavl, prospective buyers are now able to register to bid on their preferred auction. The platform will obtain permission from the listing agent and confirm within 48 hours.

Vendors can also request to have their auctions broadcast to a larger buyer audience.

Co-founder Joel Smith said that auctions streamed on Gavl attract 47 per cent more viewers than traditional ones.

He said that Request an Auction will be valuable for remote buyers.

“Buyers are able to have Gavl attend any auction they nominate, so they will never have to miss out on an opportunity due to logistical complications in physically attending the auction.

“Vendors, too, have the opportunity to directly book an auction with us, so they can open up their event to buyers all around the world. With more potential buyers, they’re giving their property the chance to receive more bids and maximise their sales result.”

Mr Smith said that prior to the Request an Auction app, buyers were limited to what they could achieve through the Gavl technology.

Gavl is a live-streaming and bidding platform for real estate auctions.

Mr Smith said that it has streamed more than 6,000 auctions, which have achieved 3.5 million views from 50 countries.

Gavl’s Request an Auction function is currently being offered in Melbourne and Sydney only.

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Boost for investors as app sets up off-site bidding
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Having to split her time between Hong Kong and her original base of Sydney has not slowed Julia Tita’s goal of building a high-performance Australian property portfolio. Instead the resulting alterations to her strategy have positively impacted her investing success.

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Having recently purchased her 6th property, Julia joins host Tim Neary to discuss her journey, share her ups and downs over the years, and reveal her thoughts on why some properties are better than others.

Julia also explains why she no longer makes a move without the help of a buyer’s agent, why working with a strong team of specialists is extremely important and discloses her long-term property ambitions.

If you like this episode, show your support by rating us or leaving a review on iTunes (The Smart Property Investment Show) and by following Smart Property Investment on social media: FacebookTwitter and LinkedIn.

If you have any questions about what you heard today, any topics of interest you have in mind, or if you’d like to lend your voice to the show, email [email protected] for more insights!

RELATED AREAS OF INTEREST:

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AREAS MENTIONED:

Eagleby
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How a move to Hong Kong impacted Julia’s Australian property goals
object(stdClass)#1218 (52) {
  ["id"]=>
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  ["title"]=>
  string(88) "‘Common’ referrer practice of being paid on both sides of the fence coming to an end"
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  string(82) "common-referrer-practice-of-being-paid-on-both-sides-of-the-fence-coming-to-an-end"
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  string(246) "

The practice of property investment firms sharing undisclosed kickbacks among the supply chain involved in development sales will be outlawed in NSW on 1 July this year under the Real Estate Reform being handed down by regulators in NSW.

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Property commentator and valuer, Suburbanite’s Anna Porter, said the reform will address conflicts of interest.

She said they arise when a mortgage broker, accountant or financial planner receives part of the commission from the property firm, who receive their fees from the developer or seller.

“This puts the broker into a position by which they are being paid on both sides of the fence,” she said.

“Until now this has been a grey area and there was nothing stopping this practice.” 

Ms Porter said this has been a common practice in the industry.

"Some well-known mortgage broking firms openly admit to receiving $5,000–$10,000 per referral in their pocket.”

She also said this process has been going on for decades.

"Property investment firms commonly pass some of their commission on to the mortgage broker, accountant or financial planner as a reward to them for passing on the referral. This means that many brokers or financial service providers are making significant amounts of money just to refer on to a property firm, often totalling hundreds of thousands of dollars a year," Anna Porter said.

Ms Porter said the Property, Stock and Business Agents Amendment (Property Industry Reform) Bill 2017 will be in force from July this year, and will prohibit this practice unless the broker or referring partner also holds a real estate industry license.

"Under the new laws, if the broker takes a referral fee from the property firm, they will have to be a licensed real estate agent and also hold a corporation’s license,” she said. 

“Subsequently, every transaction that they receive a referral fee from, they will be putting their license up against the transaction and taking full liability for the conduct, practices and outcome of that transaction, even if they have little to do with the transaction; they are a party to it financially and therefore take as much risk as everyone else in the transaction.”

Mr Porter said where a referrer holds a real estate license, and receives a part of the sale commission, they may find themselves in breach of the ethical requirements under the act.

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‘Common’ referrer practice of being paid on both sides of the fence coming to an end

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