Impact of interest rates on your investing

[SuperDad]

Hi all,

I just thought I'd throw out a question this morning.

How much are the rising interest rates impacting on your investing decisions?

For me, they are having quite an impact at the moment.

My wife and I have just sold a property, and are in the process of deciding what to do with the equity we have realised. The natural temptation (well, natural for me at least) is to look at another property purchase.

However, the high interest rates (around 9% fixed for 2-5 years) are causing us to pause.

At the moment, our plan is to hold off purchasing until interest rates drop to below 7%, and focus on improving and maintaining the two properties we currently have, in order to build more equity and protect (and increase) our cashflow.

So, are the high interest rates having a similar impact on your investing decisions?

Paul.

[Monid]

Well they have been having some effect, but not much since we are only casually in the market at the moment. Although we are thinking about diversifying into stocks (though it seems somewhat of a bull market there as well at the moment)

At the moment, our plan is to hold off purchasing until interest rates drop to below 7%, and focus on improving and maintaining the two properties we currently have, in order to build more equity and protect (and increase) our cashflow.

I'd qualify this, what you care about isn't the level of the interest rates it is the relationship between the yields and the interest rates. Ideally you want the average yields to be at least 2-3% above the average interest rate.

So other than improving and maintaining your existing properties what are you going to do with the money in the meantime? Pay down existing mortgages or revolving credits, keep it in the bank?

Cheers
David

[SuperDad]

Hi David.

You wrote:

I'd qualify this, what you care about isn't the level of the interest rates it is the relationship between the yields and the interest rates. Ideally you want the average yields to be at least 2-3% above the average interest rate.

Well, I'm not sure that I would offer this exact qualification. My wife and I don't employ a "yeild must equal at least interest costs + 2%" formula. If we did, this would seriously restrict our investing. For example, if interest costs are 7%, then we would need to be looking only at properties yielding 9% or better, which would restrict us to dogs (in my opinion). Rather, we are looking for properties to which we can significantly add value (by renovating or subdividing). Such properties will likely yield around 5% against purchse price - not a flash yield.

You asked:

So other than improving and maintaining your existing properties what are you going to do with the money in the meantime? Pay down existing mortgages or revolving credits, keep it in the bank?

We have one small RC facility, which we will pay down. Otherwise, we will put it on term deposit or in call accounts (around 8.25% and 7.6% respectively, less RWT). We want to keep this money entirely seperate from our loans (i.e., with a different bank). Call me paranoid, but I don't want our lending bank to have easy access to our cash if they decide we are too highly geared (currently at 87%!). Some of the money will be spent on improving one of our properties, which will reduce our gearing to a more respectable level.

Paul.

[Dean@Massiveaction]

I guess it comes down to what you think the growth is likely to be if you do buy now. If a 2% increase in interest rates on say a 300K purchase means increased holding costs of 6K but the property rises at 15K per annum and it takes 2 years for rates to drop my spin on it would be that you are 18K worse off by waiting.
However you may sleep better at night not worrying about the market.

I'm getting fussier about what I buy but still buying.

[poormastery]

As a boring buy-and-hold investor, I suppose poormastery is trying to look out 25 years (as well as making sure cash flows survive and perhaps even flourish in the intervening period).

My personal view is that there may well be a period of short term economic pain in NZ (hopefully lasting only a couple of years?). The government must raise the household savings rate - NZ is already 15 years behind Australia in respect of savings levels. Increased savings rates will damage consumption spending in the short term.

Making the enormous leap of faith that the government will slowly succeed in raising the household savings rate in NZ, my punt is that interest rates will be significantly lower in 10 years than short term interest rates are now. Of course, short term rates haven't peaked yet.

Another theory of mine is that it is best to buy property when interest rates are at or near their peak.

As such, higher interest rates make me more interested in buying, although I would need to find something that was suitable. I would like a property that was broadly cash flow neutral (and would settle for a property that was slightly cashflow negative, if I thought there was sufficient growth opportunities).

A commercial property in a small town could possibly be my only hope?

I certainly intend to have a look around at the end of year. We will see...

Regards,
*poormastery*

[tricky]

However, the high interest rates (around 9% fixed for 2-5 years) are causing us to pause.

At the moment, our plan is to hold off purchasing until interest rates drop to below 7%, ....

You could be waiting for several years.
So you're happy to invest at 6.5% but not at 9.5%?
The 3% increase knocks you out?
If property increases by about 10% and you find a good buy then won't you be ahead even with the 9.5% mortgage?
Just my thinking at this early hour of the day....

[poormastery]

I should emphasise that I wouldn't consider buying this year because I think that property prices are going to rocket up in the next couple of years (as pooomba and tricky seem to believe, unless I am misreading them).

In fact, I think completely the opposite view. I suspect that property prices are quite likely to fall in the next couple of years.

Nonetheless, I would still consider buying something if I thought it might be a good long run investment, and I would then simply ignore any short term volatility...

Regards,
*poormastery*

[Dean@Massiveaction]

Poormastery we would NEVER think that you would agree with us naive rabid, rampant, capitalists. That would take all the fun out of life :-)

[poormastery]

Being chased around like a mad cow!

Hi pooomba,

I had the pleasure of watching your blogs last night. They were actually very good – I thoroughly enjoyed them. My favorite one was the last one you did on narcissism. Congratulations!

Curiously, the man who used to hound the humble poormastery about the forums, and scold me for not discussing property, was doing no such thing himself! Whatever next!

To be sure, the humble poormastery has always been most comfortable walking a different step.

Nonetheless, I am not sure that you understand my political views. The last time I voted in NZ, it was for the Association of Crooks and Thieves, and I think they got about 2%...

Such is life!

Regards,
*poormastery*

[Dean@Massiveaction]

If you go through the historical blogs PM you will find this is a one off series in response to so many people asking about mindset to assist them with their investing. We will be back to property next week!!

[poormastery]

Pooomba,

I did in all seriousness enjoy your blogs.

Poormastery was not criticising you, although perhaps I was mildly criticising your criticism. A riddle.

Regards,
*poormastery*

[Gatekeeper]

I'm with Poormastery. I'd love to buy another property I've had my eye on for years, but I'm patient and returns are pathetic. It's on my home boundary, and I already own my two neighbouring properties. The opportunity will appear at some time, I just need to be in a good position to take advantage if/when the time comes. Rushing in (in case you miss out ) is often the wrong move, especially in these times.

I changed my tack three years ago to get a better return. Sold off a long timer that was getting a bit old (100yrs ), and paid off my other rental and built a new one, both short term furnished rentals. Playing tourism/immigration has been fun and very cashflow positive.

I put my leftovers into NZ energy related shares (WTL, NWF), a bit of a play, but got in early and it seems to have paid off, and hopefully will get a good divi

There is certainly more to investing than just property.
I have a good friend staying who trades shares/options, and has lived off it for seven years.
I'm watching over his shoulder and learning. Not sure if it's my thing, but it's been incredibly interesting.

Any extra dosh I can gather will go into energy efficiency at my rentals, as I'm paying the power bills . In the coming inflationary environment, energy and food will be biggies. Investing in cutting costs can be as efficient as making more (worth less) money.

[spaceman]

Interest...bah humbug

I bought my first property in 1997 and can honestly say since that time I've never based any decisions on what the interest rate was at the time.......that is still true today......though I do concede the rates haven't been to the lofty highs that some of the crustier PT members may have had to endure I doubt it will ever affect my decisions in the future.

Superdad.....I'm not sure of how your structure is set up.....but I would guess that you'd be better off from a tax point of view by not paying off your mortgages on the IP's but on your PPOR.....but you probably knew that already.

Cheers
Spaceman

[NZGEMS]

Did you sell the one we had the BBQ at Paul?

[Tucker]

I think for people that are waiting for a dip in houses prices before they buy their next deal may be worse off then if they bought earlier on. I have noticed a lot of people have been saying this for quite some time. Even if we went back to early last year (alot have been waiting way earlier than this) we have seen up to 14% growth in some areas up to about today. If or when a dip in prices comes along you may have had up to 20% growth since you decided to wait. A dip of 5 - 10% you will still be worse off than if you bought earlier. What if the dip comes later, or if the dip comes and you buy during it and it dips slightly further. You will probably be in the same if not worse position than if you bought earlier. I think the majority of positive cashflow properties are long gone (except for the odd one or two that have a twist to them) unless you can add value to increase rent considerably, pay down the mortgage or something similar. Waiting for positive cashflow may be a mistake too.