All Topics / General Property / Effect of Interest Rate Rises

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  • Profile photo of maximillionmaximillion
    Member
    @maximillion
    Join Date: 2003
    Post Count: 1

    I’m new to the potentials of investing in cash positive properties, however I need insight into the potential inpact of interest rate rises on cash positive property investing. Is there a margin that everyone should build into the 11sec formula [?] It’s a scary thought that what could start out as a cash flow positive property could erode into a cash negative property with interest rate rise(s)…and the naturally occuring rises when rates go up for everything! (ie; management fees, strata fees, rates, etc)
    I welcome all feedback on this issue as it’s my stumbling block when it comes to launching myself into cash flow + investing.[:)]

    Profile photo of MJKMJK
    Member
    @mjk
    Join Date: 2003
    Post Count: 157

    Maximillion,

    If you have a property earning 10% and costing 8% ( 6.5 in interest and 1.5% in costs ) you can afford a 2% rise in interest rates before it goes nuetral ( which is not yet negative ) The point to consider is is it worth holding nuetral property in rural areas ?????
    Now if you can find a 20% return then great. I cant!
    So if you do end up at nuetral or negative what kind of property would you like to be holding ? I would suggest one with alot of on paper tax deductions.
    So you say, “I’ve locked my rates in at 7% for 5 years” and I say ” well you’ll have cash flow for five years”. Are you happy with that?
    Others may beg to differ.

    MJK

    Profile photo of CahKingCahKing
    Participant
    @cahking
    Join Date: 2003
    Post Count: 15

    Hi Maximillion,
    Just stating the obvious, but with all of the costs going up with inflation etc and interest rate rises, rents will generally be increased along with these costs. There is nothing to stop you fixing part or all of the loan which mitigates some of the financial risk of interest rate rise. MJK is correct with regard to paper tax deductions. Consider that even if a property becomes Neutral in cash flow terms, there is still the possibility of Capital gains….even if that is 4-5% per annum, you are still making money…not losing it. If a property is cash flow neutral…there is no need to sell it. If it becomes negative and this cannot be changed by a refinance or rent increase or whatever, then get rid of it, pay your CGT…and BE HAPPY that you made money….it may not have been a fortune, but it sure beats the F#@* out of losing money!!
    Cheers
    Ca$hking[8D]

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