During 2022, the Reserve Bank of Australia increased the cash rate eight times, and in turn interest rates increased by 300 basis points to December. Naturally, times of increasing interest rates can result in temporary periods of poor cashflow for investors.
Here, inSynergy’s Chief Property Wealth Planner, Richard Sheppard, shares his top tips for managing temporary poor cashflow.
Speak to your lender or broker to re-price your loans
Proactively ask your lender to re-price your existing home and investment property loans. While your bank would have offered you a competitive rate when you first took out your loan, over the life of the loan (and recently with the increase seen in interest rates), your interest rate and repayments would have increased. Unless you are on a fixed rate loan.
Call your lender and ask for a better variable rate. You will not need to provide any paperwork or make any other changes to your loan; however, it will help if you do some research. Know what the market rates are for home loans. Let the bank know if they do not match the market leading rates, you are prepared to consider moving to another lender.
When you phone your lender and ask for a better rate, you will often receive a rate 0.5 per cent -1.0 per cent better than your current rate, which will save you $5,000 -$10,000 per $1 million in debt per annum.
Increase rents in investment properties
Look at the weekly rental amount you are charging your tenants. If you have not increased the weekly rent in the last six – 12 months, or if you are not charging the market rate, increase the rent in your investment property as soon as the lease allows.
You should always check what comparable properties are asking online. Even in times of economic uncertainty, rental prices rarely go backwards. With increasing rent amounts, and mortgages being paid down, if your property is not currently cashflow positive it can and will be.
Across Australia, the average increase in weekly rent in 2022 was 10.2 per cent. In Adelaide, the 12-month rent increase was 12.9 per cent to an average of $518 per week, Brisbane increased by 13.4 per cent to an average of $588 per week. Canberra remains the most expensive capital to rent at $681 per week on average, despite recording the lowest annual rental increase of 4.3 per cent.
Re-finance short term debt
Short term debt (credit cards, car loans, secured/unsecured personal loans) have high interest rates (over 20 per cent for credit cards) and high repayments.
A car loan is typically a three to five year term, which means the repayments are high in order to pay it off in this time. However, if they are refinanced against a property, the term can be up to 30 years. So, the repayments can be more than 80 per cent lower! This will not only improve cash flow, but has an even bigger impact on borrowing capacity, so you could also invest in more property to substantially increase capital growth.
Use your buffer
Your cash buffer should be in place to give you peace of mind, and to use in times of tight cash flow. Remember, this is a temporary period of poor cash flow and is exactly the reason you have a cash buffer. When your cash flow returns to a healthy position, you will be able to contribute surplus cash back into your buffer.
Speak to your Advisor/Property Wealth Planner
Speak to your property investment advice professional. Your Property Wealth Planner can conduct a portfolio review and provide options aligned with your strategy, which can include selling a property to pay down your mortgage, increase your cash buffer or invest in higher-yielding property.
Sell low yielding property to invest in high yielding property
All property markets have a cycle, which generally has seven years of high growth where prices typically grow by 100 per cent (often called a boom), followed by a drop in values of five to 15 per cent.
This is followed by a period of around seven years of poor growth of zero to 10 per cent (often called a plateau). Yields on property in their plateau phase can be less than half that of property yields in growing markets.
Given the nature of property cycles, while some markets are in their plateau phase, other markets will be beginning or in the early stages of their growth phase. Selling property, you own in a market which is coming to the end of its growth phase and re-investing into property in markets that are beginning their growth phase will not only give you significantly better yields – which will notably increase your cashflow – but will also have additional property growth, which can be more than 100 per cent.
A million dollar property in Sydney is now renting for about $700 per week. However, a million dollar property in Adelaide, Brisbane or Perth is renting for about $1,000 to $1,100 per week and there are also some renting for as high as $2,000 per week. So, selling a low yield property for a high yield can increase your cash flow by more than $1,000 per week.
Remember these periods are temporary and one, or all the strategies above can significantly increase cash flow and allow you to get through the tougher times.
