A few questions to experienced people.
We all know that interest rates are going up, but by how much do we all think? And what will make them start coming back down the last time the economy crashed , Does that mean thats what has to happen again before they drop? And is there any upsides for investors if the interest rates rise?
Also how long do you wait before you increase the rent in your properties and by how much lets say for each 0.25 rate rise?
Hi Andrew,
An interesting aspect to the interest rate question is the upcoming federal election. There are schools of thought that say the RBA is reluctant to raise rates around election times. The excpetion to this rule is the last federal election where I am pretty sure it happened during the formal campaign.
I presume that higher rates would push towards a buyers market. More foreclosures and sales from mortgage stress, less confidence to buy. Seems supply would rise in comparison to demand.
Andrew
itsandrew
Go as far as you can see and you will see further.
I'm unsure how much interest rates will go up as it depends on so many factors and all of them are out of our hands anyway.
I did a quick calculation of official interest rates for the preceding 50 years and the mean is 8.05 % so were still off the mean by several points. Not that you are, but its a sign of an inexperienced investor or newby who worries too much about interest rates. They didn't stay at 3 or 4% for ever nor did they at 17%.
Good question regarding increasing rent. There seems to be no formula ( that I'm aware) After talking to many people about this I concluded that you cant put up the rent just because interest rates have risen. Sure plenty do, however in a tight rental market people are less likely to complain.
Its far better to increase the rent yearly or half yearly in conservative but fair increments then set and forget. I was guilty of the latter and am now paying for it. Never again.
I have recently increased the rent on 1 property by 10% which was not unreasonable and still below market equivalent. My PM has suggested that subsequent increases should be less, so the tenant does not have sufficient grounds to complain to the tribunal. Its a risk you have to take and consider all factors. She also suggested that significant rent increases are seen to be more reasonable by the rental tribunal (NSW) if there has been some substantial improvement to the property.
Hope this helps. So at the end of the day I have gone for 6 monthly rental reviews, regardless of interest rates. Something I should have done from day one. I've learnt.Hi Andrew.
In answer to your question about any up side to interest rate rises, my understanding is that any foreclosures that
result from mortgage stress will mean more people renting. Also more people tend to hold off buying when rates
are higher (creating that pent up demand you hear about when the government introduces help for first home buyers).
Again, they are more likely to rent, so that's upward pressure on rents. None of these things are a certainty though.As to when to put up rents, I tend to think most people hope for good long term tenants, and in those cases rises
are usually annual and not huge i.e. in line with inflation. Otherwise its probably easiest to do it when your tenant moves
out.All the best,
G
There are many advantages to interest rates rising. Rents go up (and as for your question when should you raise the rent…I would say as soon as possible to cover your costs), prices come down…meaning if you can afford it then it can be a good time to buy.
The interest rates were at historic lows because of the financial crisis. They were never meant to stay this low and thus will rise to normal levels (8-9%) within the next 2 years. So be prepared for that. Obviously this is just my opinion and there are many others out there.
The property market seems to be slowing, so it is smarter to buy for rental income and long term growth as it is unlikely you will experience much short term growth with interest rates rising.
Ryan McLean | On Property
http://onproperty.com.au
Email MeHi Andrew.
Wow, indeed their are some experts on here which have given you some sound advise.
In short, when interest rates declined in 2008, rents did not drop in value, at least not at the same rate that interest rates did.
As a real estate agent for the past 15 years, all of a sudden, owners have been calling my office demanding rent increases as rates have increased. NO NO NO.
Tenants are not uneducated people and with the ability to gather information real quick, tenants are no longer hanging around being bullied by agents/owners.
You have to be able to justify your increase in accordance to market conditions. Today, one would just jump on the net, have a look at their suburb and property stats and you quickly get a very good idea of market value.
Now a tenant does exactly the same and if the home their in is no longer value for, away they go.
You are left to foot the bill, pay the agent commission to re lease your home, rental loss of a 1 or 2 weeks to locate a new tenant, advertising costs and not to mention the possibility of a bad tenant.
Keep you rent 4 or 5% under market value at all times. This will attract very good tenants and they will be happy meaning you will reap the rewards.
Good luck out there.
Must agree with oztorro, Dont put your rents up as soon as you can , stay about 6 months behind the market . No-body likes greedy landlords. The average forgone credit to your bank account over that 6 month period will only be about $300 0r an extra $10 interest you will have to pay over that 6 months, about $ 7.00 after tax deductions. If you get to geedy and charge top dollar the tennant will want every trivial maintenace issue adressed and quickly and the more expensive options. Trying to save that extra $7 could cost thousands. A little bit off goodwill will go a looong way. An upside of interest rate rises is that the rise is usaully to counteract inflation which devalues your loan. So if interest rates go up it is because your loan has decreased in real terms.
Forgot to add that if interest rates go up 2% on a $500,000 thats an extra $10,000 a year in payments, perhaps 7,000 after ta x deductions. That would be because inflation is 3% or > meaning in real terms you loan reduced 485,000. at the same time the asset that money was exchanged for may have increased in value to over $540,000. Interest rates are of little consequence for serious investors with proper buffers in place. When you buy property you are buying time. The conditions that create high interest rates also increase the gap between the purchase price and the real terms value of the asset faster, creating wealth faster. Even if growth of the asset slows the real terms value of the loan decreases. Rental income wont make up for increasing interest rates.
Oztorro19 wrote:You have to be able to justify your increase in accordance to market conditions. Today, one would just jump on the net, have a look at their suburb and property stats and you quickly get a very good idea of market value. Now a tenant does exactly the same and if the home their in is no longer value for, away they go. You are left to foot the bill, pay the agent commission to re lease your home, rental loss of a 1 or 2 weeks to locate a new tenant, advertising costs and not to mention the possibility of a bad tenant. Keep you rent 4 or 5% under market value at all times. This will attract very good tenants and they will be happy meaning you will reap the rewards. Good luck out there.This is spot on and unfortunately, I learnt the hard way a few years ago by being too greedy with the asking rent. The place was vacant for three months and this cost me big time, not to mention the leasing fee and advertising costs mentioned above.
If your strategy is negative gearing, keeping the rent relatively low in relation to an IP's mortgage when interest rates are high works a treat on your tax liability.
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