Ways to maintain and increase residential property investment profits
The ultra-low interest rate environment is coming to an end. At its September meeting, The Bank of England (BoE) signalled that it could raise rates before the end of 2017, and many economists expect that the base rate will be increased in November. If it is, this would be the first rise since rates started to fall in July 2007.
In this article, you’ll learn what strategies you could use to ensure your residential property investment continues to perform.
Why inexperienced property investors get nervous about rising interest rates
Inexperienced property investors often get nervous when interest rates start rising. And there are a lot of property investors today that have never had to cope with an interest rate rise. These investors become concerned because their mortgage interest payments are likely to rise, as lenders react to the base rate rise by increasing mortgage rates. It will squeeze profits from buy-to-let properties.
There is no need to be nervous. Property investors have been making profits in property for decades. It includes during periods when interest rates were far higher than they will be even if the BoE should raise rates by 2% or even 3% (highly unlikely, by the way!).
Property prices can rise even when interest rates are high!
Inexperienced property investors might be concerned that their rental profits will fall. They may also be concerned that price growth will grind to a halt, and that property prices could start falling. Higher interest rates mean fewer buyers, right? Well, let’s examine some history.
For much of the 1980s, the base rate was above 10%, as the Bank of England used it to fight inflation, which had ‘crept’ up to almost 22% per year by 1979. In fact, at the beginning of the 1980s, base rates were 17%! The lowest they fell to during that period was 7.375%, and at the end of the decade, they were still at 13.875%. Inflation at that time had fallen to 5.4% (double its level today).
During the 1980s, the average house price in the UK increased from £21,966 at the end of 1979 to £61,495 at the end of 1989. An increase of 180%.
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More recently, in 2007, the base rate was 5.75% (when inflation was 2.5% and falling, a shade lower than it is today). When the Global Financial Crisis hit in 2007 and led to the Great Recession, the BoE’s emphasis for the base rate changed. Instead of using it to fight inflation, they began using it to boost economic growth. They slashed the base rate, and have continued to cut it. After the EU Referendum, the BoE cut the base rate to 0.25% as concerns grew about the economic impact of the vote for Brexit.
Since the end of 2006, the average house price in the UK has increased from £172,065 to £205,937 at the end of 2016 – a rise of 20%.
During both periods, house price growth outpaced inflation. And in periods of higher interest rates, when inflation is higher, house prices have grown faster!
Today, the tables have turned again for interest rate policy. The BoE is becoming more concerned about inflation than economic growth. To take advantage of the potential for property prices to rise faster, you must employ strategies that help you hedge against rising interest rates and maintain cash flow to fund your investment.
Cash flow strategies the professional investors use when interest rates rise
Cash flow is king when interest rates rise. It protects your rental profits and provides the funds to sustain your mortgage payments. Experienced professionals use cash flow strategies to negate the impact of rising interest rates. They do so by first defining their objectives:
- Reduce the impact of rising interest rates
- Negate the impact of rising interest rates
- Profit from rising interest rates
After deciding your objectives, employ the following strategies to achieve them
Concentrate on costs and expenses
The first thing to tackle is your costs and expenses. As inflation rises, tradespeople are likely to increase their rates. Replacement furniture, fixtures, fittings, and white goods are likely to cost more. It’s important to trim these costs as much as you can. Strike a deal with professional tradespeople, and always bargain when buying higher-priced items for your buy-to-let properties.
Review your mortgage arrangements
Your biggest cost is likely to be your mortgage interest payments. Could you get a better deal elsewhere? Might it be best to fix your mortgage interest rate? There are some great deals available, and a fixed rate will protect you from a period of consecutive interest rate rises.
Increase the rent that your tenants pay
Finally, having tackled the debit side of your cash flow, it’s time to consider whether to raise interest rates. For many buy-to-let landlords, this is a difficult decision. If you’ve got great tenants, the last thing you want to do is force them to look elsewhere by raising their rent. You don’t want them to move on and give you the headache of a costly void period.
But see it from their point of view, too. You’ve been a great landlord. Their home is always well maintained, and you’ve been responsive to their queries and concerns. Do they want to risk getting a bad landlord by moving home? Do they want the aggravation of moving and arranging removal of their belongings? Then there’s the expense of moving, too, and the idea of having to sort out their new home so that it’s as comfortable as the one they are living in now.
In addition to all these issues, your tenant is probably expecting a rent increase. After all, they know that inflation is higher. They are paying more for their food, fuel, clothes, and so on. And they’ve probably heard that more buy-to-let landlords are increasing rents as the supply of rental properties is falling.
Could you increase your profits despite interest rates rising?
These three strategies will help you to maintain and even increase profits from your buy-to-let investments, even as interest rates are rising. But they aren’t the only strategies you can use. In our article describing 27 ways to increase your buy-to-let investment rental yield, you’ll read about other strategies that you can employ to increase rents.
In my next article, you’ll learn why the best property investors continue to invest in properties even when interest rates are rising. In the meantime, why not take advantage of the expertise of our property consultants? Book an appointment with one of the Gladfish team today on +44 207 923 6100, and we’ll help you define your property investment objectives and create an investment strategy that works for you in all market conditions.
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