Hi there. I’ve just read Steve’s book and thought it was very useful. I intend to get out there asap. I have one niggling question though.
If interest rates rise, is there a corresponding increase in rent, or can a positively geared investment turn negative?
If this is the case, what could be done about it? I could easily afford several positively geared houses, but if interest rates increased without a corresponding rent increase, wouldn’t i be another of those ill-informed investors forced to sell their properties due to a downward turn in the market?
Sorry if this is a question that has been asked before[blush2]
Hi stowy
forget or this positive cash flow mumbo jumbo rules etc, the easiest way to work out if a property is cash flow positive is when you rent covers all your cost , bank rates etc without your tax deductions.
Stowy,
One simple step to avoid +cf turn to -cf is to fix the interest rate for say 5 years.Contact the financial institution that you want to borrow from find out what is the rate for 5 years fixed and use it to work whether the deal on the table is +cf or not.
If the rate rise then it won’t affect you at least 5 years.
Kind regards
Chan Dollars
[Retire Young, Retire Rich] [strum][biggrin] Agree with Chan. However 5 years may be a bit long to fix rates as it can also be expensive if rates drop and you want to get out of your fixed loan to adjust the rate.
If you are renting properties then you may want to fix your loan for the term of the lease. Most FI’s will fix loans for a minimum of 1 year.
Also never rent to close friends as it becomes much more difficult to increase rent when circumstances tell you that it is time to do so.
All investment has its own particular risk element, this is just one that is attached to property.
If you do what you’ve always done
You get what you’ve always got [grad]Be dilligent and it will work for you
To answer your specific questions:
Yes, if interest rates rise & all else stays the same (rents & other expenses), then a +geared IP can go -geared.
Same thing if rents drop.
If you’ve got 20 of these you could be in trouble!Rents are strongly influenced by rental property supply & demand, so just because interest rates go up, doesn’t mean rents will automatically go up. However over time the bottom line is that an investment has to provide a reasonable CG/return, otherwise people will (should!) invest elsewhere – factoring in the cost of selling/buying. So for arguments sake, if there’s fewer investors, there’s fewer available rentals, which should lead to higher rents (assuming no population decline). We come back to supply & demand.
Cheers, Paul.
‘The main thing is to keep the Main Thing, the main thing’
stowy, you asked:
“If interest rates rise, is there a corresponding increase in rent, or can a positively geared investment turn negative?”
The same could be asked “if interest rates reduce, do we lower the rentals on our IP’s”.
Rent is not linked to IR rise and falls. We make our own choices on these things. I have never seen anyone voluntarily reduce their rent due to market fluctuations. Sometimes people have to reduce them due to market *conditions*.
If you buy cheap properties, then IR’s won’t affect you too much. Is getting 9% return such an horrendous worry?
kay henry
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