The Reserve Bank of Australia (RBA) has once again announced an increase to the cash rate which now sits at 2.35% (September 2022) - so what does this mean for investors?
Firstly, let's remember that we're still at relatively low rates when compared to previous years. In 2014, the cash rate was sitting at 2.50% and in 2008 it hit a high of 7.25%.
Also, we're still well positioned compared to other countries around the world such as United States (3.00%), New Zealand (3.00%), China (3.65%), India (5.40%) and Turkey (13.00%).
SO, HOW CAN INVESTORS GET AHEAD OF THESE RISING INTEREST RATES?
Cash Flow
One of the easiest ways to safeguard yourself against rising interest rates is to invest in high cash flow properties - these may be in regional locations with strong growth prospects or multi-income properties such as a duplex or a house with a granny flat.
The higher the rental return and yield you can achieve, the better the chance you have of offsetting rising interest rates. Some regional investment properties can easily achieve 6%-7% gross rental returns, whilst multi-income properties may achieve up to 8%-10%.
Low Vacancy Rates
Another important factor to consider when investing in property, is the vacancy rate of that suburb. Vacancy rates show the percentage of rental properties that are not occupied by tenants. For example, it might be said that a suburb has a vacancy rate of 3%, meaning 3% of available rental housing is not occupied.
If you’re looking for an investment property, the local vacancy rate can give you an idea of how easy it would be to rent out your new place. The market is considered ‘tight’ when vacancy rates are low, which generally speaking, means rental accommodation is harder for tenants to attain. A low vacancy rate would be a positive indicator for landlords and prospective investors that the available pool of tenants is likely quite high and that higher rents will be achievable, as supply does not meet the demand.
Have A Buffer
I see it way too often, where novice investors spend everything they have on their first investment property or max themselves out on their borrowing capacity - you simply don't need to!
For example, if you have a borrowing capacity to purchase an investment property for $500,000 then perhaps consider buying something for around $400,000. This will not only ensure you''re not maxing yourself out with the lender, but it may also give you the opportunity to put a slightly larger deposit down which in turn, will reduce your loan-to-value ratio (LVR) and reduce your monthly loan repayments.
It's also important to have some cash in the bank for a rainy day, in case interest rates do rise some more, your tenants vacate and the property sits vacant for a couple of weeks, a major repair is required etc. There's no reason why you should need to spend every last dollar you have on the actual purchase.
Shop Around
Not only is it important to shop around for the best interest rate and lender, but you can also reduce your outgoings and expenses in many other ways.
Property Management
It's amazing to see how much you can actually save by shopping around for a property manager.
Firstly, you must remember the old saying of 'you get what you pay for', so don't just go for the cheapest fees around, but interview the property managers, check their online reviews, ask to speak to a couple of their landlords etc. A pro-active property manager can make a huge difference to the success of your investment.
Compare like-for-like. Some agencies charges monthly admin fees or small charges for other items, whereas others may include all of this in their management fee.
Insurance
This is a big one! I've compared insurance quotes for the same property and cover/value through different insurers and they can sometimes vary by thousands of dollars a year, especially in some of the higher risk locations such as Cairns, Townsville etc due to the tropical weather.
Simply shop around. It's so easy these days to jump online and obtain free quotes for insurance which can save you $20, $30 and even up to $40 per week - this will make a huge difference to your cash flow.
Repairs & Maintenance
Always obtain multiple quotes for any major repairs or maintenance items. Again, this can save you thousands of dollars by simply shopping around.
For example, I recently obtained some quotes to replace a colorbond roof on a property I was looking to purchase (to use as leverage for negotiating) and the three quotes came in at $18,800, $23,000 and $24,500.
In this instance, I'll be using the $24,500 quote for my negotiations, however had I already owned the property and needed to replace the roof, I could've saved $5,700 by obtaining these multiple quotes.
It's your hard earned money at stake, so don't be afraid to shop around!
Are You Thinking Of Investing?
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I hope all of this info has been helpful and wish you all the best on your property journey. Please don't hesitate to get in touch if you have any questions.
Disclosure: The information contained in this blog is our personal opinion only and is not to be taken as financial advice, as we do not know your financial situation. Please speak with your accountant or any other licensed professional for specific advice based on your own personal circumstances. We will not be held liable for any losses.
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