Are interest rates hitting your back pocket? Here are six ways to manage poor cash flow
In the past year the Reserve Bank of Australia increased the cash rate once, to its highest point since November 2011. In turn interest rates have remained higher than seen in the last 10 years. Naturally, times of elevated interest rates can result in temporary periods of poor cash flow for investors.
1 Speak to your lender or broker; 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 elevation seen in interest rates, your payments would have increased. That is, 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, but it will help if you do some research. Know what the market rates are for home loans and ask for a better variable rate on your loan. Let the bank know that if they do not match the market-leading rates, you are prepared to consider moving to another lender.
A quick phone call could save you up to $10,000 per annum. When you phone your lender and ask for a better rate, you will often receive a rate 0.5 per cent to one per cent better than your current rate, which will save you $5,000 to $10,000 per $1,000,000 in debt per annum.
2 Increase rents on investment properties
Look at the weekly rental amount you’re charging your tenants. If you have not increased the weekly rent in the last six to 12 months, or if you are not charging the market rate, increase the rent in your investment property when the lease allows.
You should always check what comparable properties are asking on realestate.com.au or domain.com.au. If you are charging less, you are essentially donating money to someone who is not a charity. If you want to be charitable, donate to a real charity!
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 2023 was 8.3 per cent. In Adelaide, the 12-month rent increase was 7.7 per cent to an average of $565 per week; Brisbane increased by 8.2 per cent to an average of $627 per week. Sydney became the most expensive capital to rent at $745 per week on average, despite not recording the highest annual rental increase.
3 Re-finance short-term debt
Short-term debt, including credit cards, car loans, secured and 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.
4 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.
5 Speak to your property investment professional
Speak to your property investment advice professional. Your property wealth planner can conduct a portfolio review and provide options aligned with your strategy. This can include selling a property to realise the profit, which can then be used to pay down your mortgage, increase your cash buffer or invest in higher-yielding property.
6 Sell low-yielding property to invest in high-yielding property
All property markets have a general cycle of 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 0 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 in the early stages of growth. 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 give you significantly better yields. This will notably increase your cash-flow, plus you will also have the additional property growth which can be more than 100 per cent. Which for a $500,000 property can be a difference in growth of around $500,000 or more.
A million-dollar property in Sydney is now renting for about $700 per week, while a million-dollar property in Adelaide, Brisbane or Perth is renting for about $1,000 to $1,100 per week. There are also some renting for as high as $2,000 per week. 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. These strategies can significantly increase cash flow and allow you to get through the tougher times.
Richard Sheppard is the CEO and founder of inSynergy Property Wealth Advisory. inSynergy provides a broad range of professional services designed to assist with all aspects of property investment. Phone 1300 425 595 or visit insynergy.net.au