Investment Property: Still a smart move, even with rising interest rates?

This is a blog about property. And you know that at Blue Wealth, we’re all about investment property. We live it. We breathe it. We do it. And we’re proud of the fact that we have helped so many everyday Aussies invest when they probably wouldn’t have done it on their own.

And the results have been awesome. The Australian property market has always shown growth historically, and the last decade has been no different. The median house price in Australia has increased by 7% per annum for as long as we have data. This growth has been driven by a number of factors, including:

  • Low interest rates: Interest rates have been at record lows for much of the last decade, making it cheaper to borrow money and buy a home.
  • Strong economic growth: The Australian economy has grown strongly in recent years, creating jobs and boosting incomes. This has led to an increase in demand for housing.
  • Population growth: Australia’s population has grown by around 2 million people in the last decade, putting upward pressure on house prices.
  • Foreign investment: Foreign investors have been attracted to the Australian property market, which is seen as a safe and stable investment.

BUT, things have certainly changed in the last 12 months.

We all know that the RBA has lifted interest rates 12 times since May 2022, increasing the cash rate from 0.1% to its current rate of 4.1%.

Investors who bought in 2022 might be reeling about what that means for them – they calculated their affordability at an interest rate of 3% and are now likely to pay up to 6%. Surely double the interest rate is going to mean it’s going to be unaffordable.

True or false?

Well, let’s see.

The interest on your investment loan is the highest cost to you, so if interest rates increase, it will cost more money.

BUT, there is a lot more to property investment than the cost of interest, so let me show you a REAL example of one of Blue Wealth’s clients who bought a property in mid-2021 and settled it just last month.

July 2021 – what was it going to cost them then?

At the time of their initial meeting, the cash rate was 0.1%. Our team calculated the cost of their property purchase at a 3% interest only loan. At the time, the average rental yield was 4.5%. Here are the results of their cash flow analysis:

Property Price$395,000
Purchase Costs (VIC)$22,293
Estimated Rental Income$338 p/wk (4.5%)
Interest rate3%
Income (for calculating tax benefits)$80,000
First-year weekly income/costIncome of $58

Yep, cash-flow positive. The property was estimated to be earning our client $58 per week after tax.

That’s gotta be different now, though, with double the interest rate payable. Let’s have a look.

June 2023 – what mess have they gotten themselves into?

The cash rate is now 4.1%, and most of our clients are able to secure interest-only loans at between 5.5% to 6%. But now we’re in the middle of a rental crisis, and this exact apartment has just been leased for $450 per week, which is 33% more than originally forecast. What does this do to their cash flow analysis:

Property Price$395,000
Purchase Costs (VIC)$22,293
Actual Rental Income$450 p/wk (5.9%)
Interest rate6%
Income (for calculating tax benefits)$80,000
First-year, weekly income/costCost of $5

Is the property costing them more to hold? Yes, of course. But at a cost of $5 per week, it’s less than most coffees, less than a Mcdonald’s Big Mac, and less than the premium Netflix plan.

The question is – can you afford $5 each week to put aside for an investment property that is likely to grow at more than 5% each year in the next decade? For this client, that’s an investment of $2,600 to make growth of over $285,000.

I think that sounds like a no-brainer.

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