Navigating interest rate hikes as a property investor can be challenging, but with careful planning and strategic approaches, you may be able to position yourself to thrive even in a rising interest rate environment.
Below, we provide some helpful tips to help property investors amidst rising interest rates.
Why are interest rates rising?
In response to rising inflation, the Reserve Bank of Australia has systematically risen the cash rate to help curb the rate of inflation. It may take banks and other financial institutions some time to raise interest rates after a rise in the cash rate. Its important to remember that the cash rate not only influences the interest rate on lending products, but also savings products.
Remember that while interest rate hikes can introduce challenges, they are a normal part of the economic cycle. By staying proactive, well-informed, and adaptable, you can position yourself to thrive as a property investor in changing market conditions.
What investment strategies can I use to help get ahead when interest rates are higher?
As an investor, the best investment strategy for you will depend on your overall financial situation and risk tolerance, so its best to consult a financial practitioner, such as a financial planner or accountant, to help understand what the best investment strategy is for your particular situation. They can take you through some common investing strategies and help you decide which one is right. However, there are a number of things that may suit most investors to help them continue working towards their financial goals when interest rates rise.
Evaluate your existing investment portfolio
Assessing the cash flow, rental income, and overall performance of each property in your portfolio may help identify any underperforming assets that might become a burden if there are more interest rate rises handed down. Most property investors are growth investors, meaning that they consider an asset’s value and potential for capital growth over the long term.
As one of the various asset classes available for investment in Australia, property is typically used in growth investing, so it’s important to remember your long-term vision and financial objectives, without making rash decisions based on current conditions or market volatility.
‘Stress test’ your investments
Understanding the potential outcomes in a ‘what if’ situation can help devise a path forward for your property investment. For example, you may run financial scenarios to gauge how your properties will perform under higher interest rates. This exercise may help you identify which properties are more resilient to rate increases.
Consider positive cash flow investments
Properties that generate positive cash flow may make it easier for the investor to withstand interest rate hikes because the rental income covers expenses and mortgage payments. Positive cash flow properties provide a buffer against potential rent decreases due to economic downturns.
Many investors with variable rate mortgages are seeking home loan reviews to discover if refinancing will help reduce their interest payments and overall loan expense. Locking in a lower rate can provide stability in cash flow, even if interest rates rise further in the future.
Diversify your portfolio
Diversification is a risk management strategy that is multi-faceted. You may wish to aim at diversifying your property portfolio to help reduce market risk. Fundamental analysis is often required, but you may wish to start looking at properties across different property types, locations and markets.
Consider longer-term leases or multi-income properties
You may wish to look at encouraging longer leases to provide stability in rental income. Longer lease terms may help you lock in consistent cash flow for a period even if interest rates rise and market conditions fluctuate. Multi-income properties may also present a good opportunity for cash flow during times of heightened interest rates. Properties such as duplexes, unit complexes and Specialist Disability Accommodation (SDA) homes are all examples of multi-income properties.
Monitor market trends
Most prudent property investors are already monitoring market trends, but it’s important to remember to stay informed about the real estate market, interest rate projections, and economic forecasts. This information may enable you to make informed decisions about when to buy, sell, or hold properties in response to changing conditions, including monetary policy tightening.
Investing in NDIS properties
Before you begin investing, there are many decisions to be made. Factors that help drive your investment decisions are current financial situation, investment objectives and preferences, tolerance to risk and ability to thrive in heightened interest rate markets. If you’ve decided that property investment is for you, then choosing the physical property you want to purchase is often considered the ‘fun part’ of the investment process.
For prospective investors seeking properties that offer strong rental yield, the opportunity to be multi-income properties, capital growth potential and also offer benefits to the Australian community, Specialist Disability Accommodation (SDA) homes might be worth considering. Offered under the National Disability Insurance Scheme (NDIS), private investment in SDA homes comes with SDA payments from the government.
To understand how an NDIS investment property loan would look in the current rate market, talk to the team at NDIS Loan Experts today!
Frequently asked questions about property investment and interest rates
What is the cash rate target?
The cash rate target is the interest rate set by a country’s central bank that influences borrowing costs and economic activity. In Australia, the Reserve Bank of Australia (RBA) is responsible for setting and managing the cash rate target.
What does ‘market sentiment’ mean?
Market sentiment refers to the overall attitude or emotional tone of investors and traders towards a particular financial market or asset. It can impact market behaviour and trends.
Is property investment a passive investment strategy?
Property can be used for a number of different investment strategies, including value investing, passive investing, growth investing, superannuation or active investment.
What are ‘financial markets’
Financial markets refer to platforms where various assets are bought and sold, such as stocks, bonds, commodities, and currencies. They facilitate trading and determine prices based on supply and demand.