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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