Step 1: Why buy now?
Many economists don’ t expect interest rates to rise anytime soon as global economies are trying to revive themselves. Still, at some point, interest rates will increase again, and you need to be prepared for it.
As a property investor, you need to be able to carry increased bond payments when interest rates are higher. It is essential to be aware of where interest rates are currently, where they are likely to move and plan for it as much as possible. In other words, you need to hedge yourself against high interest rates. But how?
One way to protect yourself is to build up your reserve fund. If you have a healthy reserve fund, it should be able to carry your higher monthly shortfalls while interest rates are high. This is still not ideal as it costs you more money to have your property portfolio but remember, property investment is about long-term cycles, and you want to ride the cycles and use them to your advantage.
When interest rates are high, it becomes difficult for property owners with mortgage bonds( most property owners) to own their property. The market can often be flooded with stock, turning the property market into a buyer’ s market with ample opportunities to buy bargains. So, when times are tough, and interest rates are high, you want to be in a position where you have cash available( a healthy reserve fund) to take advantage of the opportunities available.
It is thus critical to build up reserves in a low-interest-rate environment and not spread yourself too thin. You can even refinance your properties and keep that capital in your access bonds as reserves. We discussed this principle in a previous article, 5 Points to Keep in Mind when you Refinance Property.
If you are prepared for high interest rates, you can also acquire bargain properties( far below market value) if you have sufficient capital. In our previous article, Ready, Set, Negotiate, we discussed how you can buy property below market value from sellers in financial distress, which is often caused by high interest rates.
Another way to protect yourself against high interest rates is to fix your interest rates with the financing institutions. This means that if interest rates increase, your interest rate will remain the same. The benefits of a fixed interest rate are certainty and protection against interest rate hikes.
It’ s like getting insured against future interest rate increases. But it comes at a price( and sometimes a hefty one). Usually, when banks offer a fixed interest rate, it will be at a higher rate than a variable interest rate. Therefore, if interest rates do not increase drastically, it will cost you a lot more to have fixed your interest rate. It is also good to remember that you are competing against some clever banking analysts …
Fixing your interest rate is almost like taking out insurance; you are paying a monthly premium in case something goes wrong. The question you need to ask yourself is whether paying the premium is worth the protection. What do you think?
AUHTOR BIO: Jaco Grobbelaar
Jaco Grobbelaar is the Managing Director of Prosperity Enterprises, a property investment, structuring and education company. Prosperity Enterprises simplify investing so you can live a balanced and financially free life.
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