2 ways property investors can fight interest rate hikes

Australian property investors are in the interest rate firing line, with fast and furious rate rises spiking expenses overnight but no ability to lift rent prices until tenants’ leases are up.

We’ve now seen nine rate rises in less than 12 months… when they weren’t expected to increase for years.

Around 16 per cent of Australian taxpayers own an investment property and 70 per cent of these investors own more than one property, according to CoreLogic data.

Read more from Nicole Pedersen-McKinnon:

• 55 days or more: The credit cards with the longest interest-free periods

• 300,000 bonus points: Australia’s best rewards credit cards for 2023

• Health fund hack: How to skip next month’s premium

So how can they cope?

Because, 325 basis points of rises later, property investors may well be at the interest rate pain-point.

Here are two strategies that property investors can use to survive amid rising interest rates.

1. Review your loan

For property investors, the first rule of investing is to aim for capital growth.

“Capital growth gets you out of the rat race. But cash flow keeps you in the game,” property investment expert Michael Yardney says.

And it’s very likely your cash flow is squeezed right now.

So, the first question to ask yourself is: “Am I in the best loan?”

You will likely be paying higher interest on your investment property/ies than on your home loan, if you have one.

But the silver lining is your investment interest is tax-deductible.

Here are the top investment principal-and-interest loans, compiled by comparison website Mozo.

Note these are all virtually guaranteed to go up 25 basis points in the next couple of weeks, in step with the latest rate rise.

The common wisdom with investment properties, however, is to have your loan on an interest-only basis.

What are the merits of interest only?

Interest-only loans can be beneficial for investors because it ensures that your loan balance, and therefore the interest deductions mentioned above, stay high.

This is a particularly sound strategy while you also still have a non-deductible home loan - it means you keep the money required to service your investment property to a minimum so you retain the maximum to reduce your ‘bad’ personal home loan. (The latter loan should always be on a principal-and-interest basis so you eventually own your home.)

But if/when you repay that home loan, I urge you to have a serious think about principal and interest for your investment loan, too.

Unencumbered assets - so those you own outright - are a beautiful thing… particularly when they also earn you income.

In the meantime, you want the sharpest priced interest-only loan. These are below.

You will see that you do pay a higher rate for interest-only. But because there is no principal component, you should still make a month-to-month saving.

2. Increase your rent

Of course, the other side of the investment property equation is rent.

You can’t have missed all the stories about the rental shortage.

In fact, Domain data reveal the rental vacancy rates stood at just 0.8 per cent in January.

What is quite shocking is that there are only 33,000 empty rental properties across the country.

That, along with the steep increase in the costs of holding your investment, justifies a rental increase.

And here’s a bigger picture thought: Is it time to add to your property portfolio?

At the same time as rents are forging fast upwards, property prices in many East Coast areas are significantly lower than a year ago.

That means a big fat investment yield: this is the price you pay versus the income you earn.

“When investors realise we are near the bottom of the cycle, that interest rates aren’t going up much more, that inflation is under control, the ones with the long-term focus are going to get into the market,” Yardney says.

“And that normally happens three months or so before the media reports it.”

That's food for thought.

Nicole Pedersen-McKinnon is the author of How to Get Mortgage-Free Like Me, available at www.nicolessmartmoney.com. Follow Nicole on Facebook, Twitter and Instagram.

Follow Yahoo Finance on Facebook, LinkedIn, Instagram and Twitter, and subscribe to the free daily newsletter.