Don’t stress! Take action to keep that cash flow and your sanity!
When we meet with property investors, we discuss how stressed they might become should interest rates rise. There is no point investing in property if you can’t sleep at night. That’s why we always insist investors take 24 hours to consider a property investment opportunity before committing to it. We call this ‘the sleep test’.
Once invested, you should always monitor your property’s performance and calculate your cash flow projections at regular intervals. One of the major factors that might worry you is interest rates. When considering these, the savvy investor will allow for higher interest rates than they are paying currently. If on a fixed rate buy-to-let mortgage, you should also consider that the interest rate you pay will rise when the fixed rate period ends.
In this article, you’ll learn seven strategies you can use to protect your cash flow if you are concerned that interest rates might rise.
Before we start, how stressed are you about rising interest rates?
Before deciding on what strategy to employ, you need to measure your interest rate stress level. Work out your cash flow with mortgage interest payments at a range of interest rates higher than you are paying now.
If the result doesn’t worry you, and you can go to bed at night and sleep soundly, then you need to take no action.
When the interest rate starts to rise to a point where you get a little stressed, then it’s time to act. You don’t need stress in your life. Usually, at this stage, a small adjustment in your portfolio will suffice.
If the interest rate rises to a point where you lose sleep, you must act fast. Often, after discussing the situation with a professional, investors realise that things aren’t quite as bad as they think. It is especially true of beginner investors, who haven’t yet built the emotional intelligence required to weather the ups and downs of the property trend cycle.
What action can a property investor take to de-stress from higher interest rates?
You know, high-interest rates aren’t a factor, until they start to affect your cash flow. The higher rates go, the higher your mortgage interest payments will be. It swings the balance of your cash flow. Should they rise high enough, then positive cash flow properties could turn negative. It’s this potential strain on your finances that cause stress on your emotional state.
Fortunately, there are ways to eliminate that stress. Here are seven of the most effective strategies to destress a property portfolio when interest rates rise.
1. Sell some property
If you have more than one property in your portfolio, you might consider selling a property or two. Assess your portfolio on a property-by-property basis, and identify which are cash flow negative – the ones that are hurting your bank balance the most. These may be the ones that you need to consider selling.
But don’t let your considerations be based solely on cash flow. You may need to consider the property’s value, and any capital gains tax liability that selling might create. Remember, too, that selling a property and banking the profit could help to subsidise your remaining negative cash flow.
2. Subsidise your portfolio from existing means
If an interest rate rise has created a negative cash flow headache, instead of selling you might be better to subsidise your cash flow requirement from other means. Do you have excess income from work, or could you sell other investments? You’ll need to consider whether you could cut back on your lifestyle spending and divert that income to your property portfolio instead. Would you do better to keep your property and ride out a period of higher interest rates?
3. Remortgage to release capital
If your portfolio has increased in value, you may be able to release capital by remortgaging. This will give you the funds to subsidise higher mortgage payments. If your properties continue to rise in value, then the extra borrowing won’t be a problem as your capital growth will compensate.
4. Increase the rents you charge to your tenants
If you haven’t reviewed your rents recently, now may be the time to do so. If your costs increase as they will if mortgage rates rise, then the quick fix could be to increase your rental income. However, you’ll need to be careful with this strategy. If you raise the rent too high, or so high that you become uncompetitive in your property’s location, you could suffer a very expensive void period because your current (good) tenant leaves.
(Read this article from Ezytrac Property Group to learn more about increasing rent.)
5. Repay some of your mortgages
If you have a sizeable reserve account or savings that you aren’t using, you might consider paying off some of the outstanding loan amounts. It will reduce your monthly repayments and improve your cash flow position. It could also be a much better use of your cash than simply leaving it in a savings account paying you a poor rate of interest.
6. Increase your income from other sources
You could try to increase the income you get from other sources. Perhaps work overtime, or take a second job. It will give you extra cash to subsidise negative cash flow, but it could destroy your lifestyle. You’ll have to weigh up the pros and cons.
7. Get professional help
It is the strategy that many investors fail to take. They believe they can do it all themselves. Often doing so results in poor decisions.
As you will understand from this article, there are advantages and disadvantages with every property investment strategy when coping with higher interest rates and the stress they might cause. Usually, you need an unbiased opinion from a property expert to uncover the best strategy for your unique circumstances and long-term investment goals.
Don’t stress about rising interest rates
Stressing doesn’t help you. It won’t help your health, and it won’t help your bank balance. My experience has taught me that the very last thing to do is to hide from the situation. Address issues (or potential issues) early and your experience as an investor will be a calm, chilled, and profitable one. Prepare for the worst, act early to resolve issues, and any little bump along the way will be taken in your stride. No worries!
There’s no need to stress about rising interest rates. To discuss your property investment strategy options, get in touch with Gladfish on +44 207 923 6100. We want you to be successful in property investment, and to enjoy the cash flow and profits that we’ve helped hundreds achieve to date.
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