Hi, all. I have a newbie question that I hope will generate some thought. How many of you all have an exit strategy if interest rates were to rise by 3 – 5%? How will that affect your positive cashflow…will it become negative? How will you sustain your properties now that you have 10, 20 or more newly negatively geared propreties? Sell? Isnt that what everyone else will be doing at the same time, forcing prices down. I suppose im playing devils advocate here but I am interested to see how many of you have planned for rate rises. They do happen you know!
I wrote a lengthy post yesterday regarding this matter, but decided not to publish it. I think it would have rubbed a lot of people the wrong way. people dont like to be told negatives.
I will post it now though:
Today the RBA changed from an easing to a neutral bias. This means the interest rate trend has changed. Rates are going to go up.
Firstly, well done to Steve for his success to date.
With 130+ properties (are they all wraps?), and all of the wrapee’s paying 2% above normal rate on an inflated valuation, what happens to Steve and his wrapee’s when interest rates skyrocket? I dont think Steve is aware how these deals are like domino’s.
There is no way in hell he can get out of enough of these properties in time before his cashflow dries up. If rates go to 17% again, your wrappee’s are paying 20%. They couldnt afford finance at 4.75%, so at 20% its extremely unlikely any of his wrappee’s will not default. Even if only a few default, the domino’s may fall. I spoke to a guy who went through this in 1990-1. He explained how he was forced to sell off his 35 properties one by one into a falling market, as his cashflow dried up day by day. The end result? He was left $500k in debt. From $5m up to $500k under.
How would the wrappee’s feel about Steve selling their properties from under them? What are the legal implications? Is it even possible? Is there another exit possibility?What is the solution? Share traders have a rule. never take on more positions than you can manage. I doubt Steve could manage 130+ problems at once with success. If it were me I would reduce my exposure, and hedge against interest rates. Then I would invest in shares.
Sorry to be a wet blanket but I hate it when everyone is lookin up and not watching out for potholes. It is the sign that things are about to turn ugly. Greed adversely affects the decision making process.
in steves defence im sure he is far to shrewed to let this happen. over the prceeding months the tone of his messages have changed and he has advocated exit strategies including selling, reducing debt, restruction loans etc etc.
not to mention all the other money he has coming in from products from this website, seminars and now the book.
the problem i have is that when steve started writing this book the strategy made a lot of sense and in a way it can be argued that it still does its just a little harder. what has never been said though is that maybe the goalposts have changed. believe me, the most switched on +ve geared property investors on this forum have drastically cut down their purchasing, are probably selling and know that steves appearnce on today tonight will have another affect on the market.
there was a post last month wch mentioned that everytime there was a property seminar then prices in regional cities went up. although no one has said it – i fear that since last week the same thing has happened and all you newbies will over the next few weeks kindly push up the property prices for those 2 years ahead of you.
i reckon a few on the forum will be selling in the next few weeks (profit taking)
rgds
THANKYOU THANKYOU THANKYOU for bringing my head back out of the clouds.you have all made some very very interesting points.it would be good to read Steve,s opinion on all of the above.One thing l did notice in the book that at no time was insurance,or rates ever calculated into the formula for a positive cashflow.They can add up to a couple of grand a year .puts a dent in a ??$40 cash flow hey.If rates did start to move up again [which they will] all those people who have bought negative geared properties will feel the pinch even more so.ah ha what will we have nothing short of a huge flood of properties hit the market as would be investers start or try to bail out.should we be all cashed up ready and waiting for the buyers market?It,s happened before and will for certain happen again.and YES after STEVE,S T.V SPOT regional markets were ready and waiting for us all.As are some of you investors who are ready to move on .ALWAYS A NEW KID ON THE BLOCK READY TO PLAY.
cheers lynnem
p.s thanks again for throwing the wet blanket
[/quote]Hi all
if you buy right you should always have a buffer if the worst happens, high vacancy rates, rising interest rates etc. i feel save, i take insurance i lock in some fixed rates.
But we need to correct a few point
“Today the RBA changed from an easing to a neutral bias. This means the interest rate trend has changed. Rates are going to go up.” Neutral does not mean up it means neutral. I feel the next cut will be down. Our economy is not stong enough to lift interest rates it would kill business and investment the things that drive the ecomony. If it wasn’t for the property boom we would be enjoying lower rates. Interesting todays unemployment figures were worse than expected sudenly a rate cut is back on the table perhaps by the end of the year.
Crashy are you trying to scare people – rates may rise in the comming years but do you realy believe they will get to 18% i don’t think you do. It is possible that we are in a period of prelonged low interest rates. further to that people such as myself who have a high exposure to real estate can lock in fixed rates which i do.
Adrian you are right we need to have an exist strategy. I own about 20 properties. but i have stopped buying i can’t find properties that met my strict criteria of about 25% return on investment. I’ve done well in property over the past 6 years i’ve made $600,000 capital gains plus cashflow. i’m happy to sell half of my properties, which i’m doing now sold 5, 5 to go. But i’m not leaving the market i’m looking for a better one which i believe i have in New Zealand. So i’ll keep buying cash positive properties ones that are returning 25% per year in cash flow not taking into consideration capital growth.
regards westanI wholeheartedly agree with AussieRogue bigtime in that Steve is fully aware of the potential impact of these circumstances and has taken steps to minimise risk where possible, eg he mentioned at the recent wrap weekent that part of his total loan portfolio is fixed (not variable), to minimise the interest rate risk. Obviously the other key factor is that he is using ALL surplus cashflow to reduce the debt on his investments now (and hence reduce interest costs). Should interest rates reach 12% (18% come off it Crashy), Steve could probably afford to reduce the wrap purchasers interest rates for a short time (say 12 months) to maybe 9% and STILL make positive cashflow out of the deal, because he has correctly structured it in the first place. I also think that the market has changed, I am looking to sell at present and have not bought anything for months as the market is so high.
Westan, I like your thinking too. If the market is too hot – find another market! And stick to what you know works.
But who knows, this boom may continue for another 2 or 3 years yet and we may (in hindsight) look back then and say, why wasnt I buying in 2003???
I mean we all agree cashflow is the go. We’ve had -ve geared property and realised that doesnt work, so we now want positive cashflow property, and if that doesnt work because interest rates may rise what else is there? Super happy 100% fun mega positive cashflow?
Tas [
]It’s all just speculation really. That being said I have no doubt that some of the outer suburbs and major regional centres in Vic and NSW are over heated and when rates go up there will be a major bail out.
I feel sure that rates will not top 10% in the next several years but a rise to 8% in the next few years is a near certainty imho.
But what the hell do I know?
Interest rates will not hit 17% again any time soon, maybe not even in our lifetime. With the amount of debt the average household has taken on based on buying property and refinancing to access equity, a sharp rise in rates would cripple the average Australian family (not just the investors). The RBA is well aware of this and would not act so irresponsibly.
Interest rates could go up but Australia already has some of the highest interest rates in the world. If interest rates do go up, even minimally, it will mean the RBA is trying to slow the economy and inflation. This means wages, cost of goods, and yes house prices AND rents will be continuing to rise.
You must understand we are in a new, unprecedented financial age. Allen Greespan, from the reserve bank in the USA, has rewritten economic philosophy and the way we deal with Interests rates.
To throw out comments like “17% interest rates” is to ignore economic fundamentals and the way the RBA and other Federal Reserve banks now operate. Frankly it’s nonsense.
A well-developed property portfolio will be able to handle any realistic raise in interest rates.
I do agree that you can sometimes find posts on this site by enthusiastic people that many not fully understand the economic fundamentals behind what they are doing, but to throw up 17% interest rates is just nonsense and unfounded.
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