Secret to property investing success: Not having to sell at the wrong time

Thursday, 4 October 2018

A mortgage interest rate increase can be manageable if you're working but quickly become a crisis if you lose your job.

OPINION: They say property is all about location, but it's also about timing. Whenever you buy in, you need to be able to hold on when the going gets tough, so you don't have to sell at an inopportune time.

If you haven't been in the market long - or your memory is short - you might wonder what a bad time to sell looks like. Interest rates have been low for the better part of a decade, and house prices have been rising almost as long. Demand still outstrips supply, and the OCR isn't expected to rise until 2020.

But assuming prices will always rise or that borrowing will always be cheap is foolish – just ask someone who experienced floating rates north of 10 per cent around 2007, or 20 per cent in the 1980s. Or consider that prices fell 40 per cent in the late 1970s, and during the GFC they fell 8 per cent.

What happens to house prices during those times isn't the biggest issue – it's whether you have to sell and realise the loss. Being able to hold on in the tough times, so you can sell when the time is right, is crucial.

A 1 per cent rise in interest rates will increase payments on a $400,000 mortgage by $77 a week.

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Hannah McQueen: 'If you're highly negatively geared you're the most at risk to changes in interest rates, income or big maintenance bills.'

For a property investor, most of this comes down to the age of the property, gearing, and preparation.

If you're highly negatively geared you're the most at risk to changes in interest rates, income or big maintenance bills.

Some of the guidelines I give my clients include getting the amount you're topping up your property (the difference between rental income and mortgage costs) as low as possible and buying as new as possible – to limit the chances of needing to, say, replace the roof right when cashflow's tight.

Then, you need a buffer in your personal finances to help cover rising interest rates, maintenance or loss of income. Vacancy is also a risk – but I believe it's limited to the amount you have to drop the rent by in order to secure new tenants.

A 1 per cent rise in interest rates will increase payments on a $400,000 mortgage by $77 a week ($52 after a tax rebate), or $96 on a $500,000 mortgage and so on. If you're employed, that increase may be insignificant – but if you lose your job it will quickly feel impossible.

The risk is in how long it takes to find new work, or if your new income is lower.

The buffer simply buys you a degree of comfort during uncertain times. At a minimum it should equal two to three years of topping up that mortgage. If your top up is $150 a week your buffer would be $15,800 to $24,000. This can be cash, a revolving credit, or if times get desperate – an advance on your credit card.

You can buy in the very best location, but you could still get burnt if you're forced to sell at the wrong time, which is why being prepared to hold on for the ride is so important.

Hannah McQueen is an authorised financial adviser, author, accountant and founder of enableMe and propertyPro.