IR - How well are Somersofters Coping

A friend and I was discussing property and he mentioned that he was paying approximately 73k on interest payments on his rather expensive property which he is getting 700pw rent. Needless to say he is very negative geared.

This is not an isolated case and there are also people at work who are stressed to the max on their very NG portfolios. As a matter of fact some of them are sick of the stress and are looking to sell...in the worst possible time.

Whilst a few people like Josko, Lizzie have shared their view on negatively geared portfolios... (thanks guys). I wonder how people are going in terms of coping with interest rates....as they have gone up over 1.6% in just 6 months. The media is reporting alot of D&G....but I not convinced that SSers are affected as much? Would be great if any of you could share your experiences.....

From my perspective whilst I have affected slightly....the rising rents on my portfolio is giving me a larger and larger positive income. It will rise from 200pw positive to something like 400pw positive by next June.

Look forward to your experiences.

We have been more affected by banks tightening their lending criteria than interest rates.

Still wherever there is a block there is something to learn and learning lots about types of loan products available was a huge help to us.

I don't worry about interest rates I'm more interested in taking advantage of maximum leverage opportunities.

Xenia....this is exactly what I am worried about!

Interest rates are less a worry at the moment. It is certainly getting interesting in the credit markets....particularly due to a few Home Loan providers being bailed out in the USA by the govt.! We in OZ don't have the same issue....but the banks will tighten even more as a result.

Xenia said:

We have been more affected by banks tightening their lending criteria than interest rates.

Still wherever there is a block there is something to learn and learning lots about types of loan products available was a huge help to us.

I don't worry about interest rates I'm more interested in taking advantage of maximum leverage opportunities.

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sash said:

I wonder how people are going in terms of coping with interest rates....as they have gone up over 1.6% in just 6 months.

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That's ONE Point SIX Percent. Not seexteen percent!

Some quick turn over projects like developments and mezzanine finance are will pay up to 25% per month to private investors. There are very sophisticated investors that will pay this amount just to get the deal happening..... This tells me that there are many opportunities out there for people who are switched on enough to notice them.

Hi Sash,

OK, I'll 'fess up...

High interest rates are bighting on my negatively geared portfolio. Presently I pay $87K pa in interest (8.7% on $1.0M) plus $8K land tax. I earn $34K in rent at $650pw. So, I'm funding a pre-tax shortfall of $61K. The tax back helps a little bit, but I'm still funding about $40K in annual after tax holding costs which is a big slice of pie.

But, if I develop it and sell two of the three then it gets right back to virtually neutral:

i.e. Residual debt of $600K (could be better but being conservative) means $52K pa interest. Rent would be $42K at $800pw. The valuation would be about $850K with a few hundred in equity left in it. These are all very conservative worst case sort of numbers, but illustrate that developing it and selling down really improves my position.

However, I figure I'd like to hold another year or two at $40K pa cost to ensure I'm building into a solid market where my GR is improved. In that case, my end position is much stronger when its all done. Even if I get another $15K each for them then that $40K in holding cost is offset. And delivering stock to the market in 9 months time might be a very different outcome than in two years time. I'm opting for the two years for now to see off the doom and gloom.

Cheers,
Michael

Increase of 1.6% from 8% to 9.6% is about a 20% increase in repayments if you were on a variable rate. So if you were paying $5000 per month you will be paying $6000 per month....still significant increase!

I don't like the idea of Mezz deals in the current climate. There risk factor is much bigger.....but 25% per month!...how do people make a profit from developments?

Xenia said:

That's ONE Point SIX Percent. Not seexteen percent!

Some quick turn over projects like developments and mezzanine finance are will pay up to 25% per month to private investors. There are very sophisticated investors that will pay this amount just to get the deal happening..... This tells me that there are many opportunities out there for people who are switched on enough to notice them.

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sash said:

As a matter of fact some of them are sick of the stress and are looking to sell...in the worst possible time.

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Why is this the worst possible time? Property prices are still extraordinarily high and have hardly declined at all.

A lot of people believe that if the credit market recovers to normal things will boom again, but I'm sorry to say that the loose lending we've had over the last few years is anything but normal. I believe that Australian residential property prices will never again reach these levels in real terms.

That is, this is the best possible time to sell.

Hi Sash, I do believe a lot of people are starting to feel the pinch.
For us it will be when our fixed interest rate runs out on our PPOR at the end of the year.Currently at 7.2% jump to 9.58% + $$$ I can't keep track of it as we are with the CBA.They are in bed with the RBA for a good cause though
I think fixed interest rate terms expiring will be a presssure point for a lot of people who are stretching the budget already to make ends meet,servicing existing neg geared IP's.
I wish I could go to my employer and just take an extra $$% pay rise because the cost of borrowing has increased for me
I am suspect to independant interest rate rises from banks who in slow times of borrowing are becoming creative in increasing bottom line profits.
That said, I hope the banks are prepaired to go the extra mile when and if the coin flips and the RBA reduces interest rates

DCI said:

That said, I hope the banks are prepaired to go the extra mile when and if the coin flips and the RBA reduces interest rates

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Dont hold your breath. It will make you blue in the face.

Sorry one to many blue faces ......I know go yellow

By far the biggest showstopper for me has been the tightening in lending practices by the banks and non bank lenders.
I'm fortunate in that I've locked most of my loans in the mid 7's for 5 years. However, my most recent deals have been a combination of mid 8's fixed and 9.10 variable. I was happy to pay the going rate as the deals themselves were great opportunities and there was no way I was going to miss out for the sake of a few bucks a month in interest charges.
In 5 years time, the equity we generate from the deals we do today will make the interest charges look like a rounding error.
Interests rates are just a cost of doing business. I prefer to focus on the business and the deal than the costs, providing I can risk manage those costs.

Hmmm......I don't know how to take that?

Do you own property and would you be prepared to sell now?

Cheers,
Sash

HiredGoon said:

Why is this the worst possible time? Property prices are still extraordinarily high and have hardly declined at all.

A lot of people believe that if the credit market recovers to normal things will boom again, but I'm sorry to say that the loose lending we've had over the last few years is anything but normal. I believe that Australian residential property prices will never again reach these levels in real terms.

That is, this is the best possible time to sell.

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Robwilliams590 said:

By far the biggest showstopper for me has been the tightening in lending practices by the banks and non bank lenders.
I'm fortunate in that I've locked most of my loans in the mid 7's for 5 years. However, my most recent deals have been a combination of mid 8's fixed and 9.10 variable. I was happy to pay the going rate as the deals themselves were great opportunities and there was no way I was going to miss out for the sake of a few bucks a month in interest charges.
In 5 years time, the equity we generate from the deals we do today will make the interest charges look like a rounding error.
Interests rates are just a cost of doing business. I prefer to focus on the business and the deal than the costs, providing I can risk manage those costs.

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Stop stealing my thoughts Rob!!

Pretty much the same situation. Majority of my debt is locked in mid 7's with the exception of the last loan which is variable. Wasn't going to let the deal go due to rates, again need to keep an eye on the bigger picture in which the extra bit of interest pales into insignificance.

Robwilliams590 said:

Interests rates are just a cost of doing business. I prefer to focus on the business and the deal than the costs, providing I can risk manage those costs.

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Bam, my thoughts exactly. I'm getting into the market for the first time very soon. It's not going to be as cheap as 5 years ago, and interest rates are higher than even a month ago, but I can't sit there on my hands waiting for the mythical perfect time. It's like buying a computer, you will wait forever if you wait for the "perfect" prices on hardware!

I plan to keep my IPs for the long haul. Sure if I had a quick sale strategy I'd get the *** I'm sure, but in the long run you're exactly right, nothing more than a rounding error by comparison, and instead of what-if-ing, I'll have a house!

All true but when 30 basis points is $1500 p.a. its worth fighting for.

HiredGoon said:

Why is this the worst possible time? Property prices are still extraordinarily high and have hardly declined at all.

A lot of people believe that if the credit market recovers to normal things will boom again, but I'm sorry to say that the loose lending we've had over the last few years is anything but normal. I believe that Australian residential property prices will never again reach these levels in real terms.

That is, this is the best possible time to sell.

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Hired Goon,

I have several properties spread out between the Gold Coast to the Sunshine Coast. I have been advised that the market has died off considerably and if I was looking to sell I would have to drop the price down by 10% in some cases to make a sale in the short term. If anyone is looking to sell (Eg.me), it is because they can no longer afford the property and must off-load it. Therefore I cannot wait around for the odd mum & dad buyer. How many M&D buyers are out there? Not damn many! They come back with the beginner investors in the boom!

It is a Buyers market.

Regards JO

Robwilliams590 said:

Interests rates are just a cost of doing business. I prefer to focus on the business and the deal than the costs, providing I can risk manage those costs.

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Exactly! I would have thought that many SSers would have calculated their interest expenses with an extra margin to take into account rises in IRs. We always allow for a huge increase above current rates - a legacy, I guess, of our experiences with the 17-18% rates in the 1980s.

We are coping just fine, and won't be losing any sleep if IRs continue to climb. That's not to say, of course, that I'm ecstatically happy about increasing IRs - I would vote for the money in my pocket rather than the Bank's any day!!!

Cheers
LynnH

josko said:

I have several properties spread out between the Gold Coast to the Sunshine Coast. I have been advised that the market has died off considerably and if I was looking to sell I would have to drop the price down by 10% in some cases to make a sale in the short term. If anyone is looking to sell (Eg.me), it is because they can no longer afford the property and must off-load it. Therefore I cannot wait around for the odd mum & dad buyer. How many M&D buyers are out there? Not damn many! They come back with the beginner investors in the boom!

It is a Buyers market.

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Yes, the market has come off a bit, but the downturn has only just begun.

Prices will fall, people will feel poorer and then the wealth effect disappears and our debt dependent consumer economy goes down the toilet. We've been in a generation long credit bubble and the correction now is not going to be like the 1970s or 1990s, more like the 1930s or 1890s.

I think we'll see an over correction where it becomes cheaper to buy than to rent but nobody has any spare borrowing capacity and lenders are cautious.

Then, prices will never again reach these levels in real terms during my lifetime.

LynnH said:

Exactly! I would have thought that many SSers would have calculated their interest expenses with an extra margin to take into account rises in IRs.

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Or 100% locked if you can't afford it. Look at all the people on this board who are not locking right now because "interest rates have peaked".

Well Im sorry to say you are going to be hurting more 6 months from now... You have all the data in front of you. No one but yourself to blame if cannot afford another 1% or 2% hike and still dont fix now.

My properties have just turned positive. Next month when I come off fixed interest for one they will be negative by about $2000/yr in total.