In 2024 many property investors are under mortgage stress, and many are selling. Which is fair enough. Interest rates are now at a level where investing in property might not make sense for some people.
Property Investors now need to consider whether there is currently a better place they could be investing their money.
With that said property investing is a long-term strategy. If property investors can manage the extra loan repayments, over time, history has shown long-term property investing is worth it.
If you are a property investor that just can’t fund the shortfall then yes selling in 2024 needs to be done. Recently I sold two properties that the owners bought and sold within a year. One made a $50,000 loss on what they paid while the other made a $80,000 profit. But had to sell due to mortgage stress. There is no shame in that. In fact congratulations to property investors that realise this and take immediate swift action.
Even Kath & I have looked at some of our investments recently and thought “Oh maybe we need to sell something to make our cash flow better”. But after meeting with our accountant and financial planner, we all decided it’s OK, the long-term benefits outweigh the current increase in repayments. Which was a relief for me because I really didn’t want to have to sell anything.
If you own an investment property on the Sunshine Coast and feel some mortgage stress, the first thing I suggest is having me do a remote sales appraisal. This would give you a starting point of what’s possible so you can run some numbers. Being a remote appraisal also ensures your current tenant and property manager don’t freak out about a possible sale that might not even happen.
A remote sales appraisal is someplace where I reach your investment property online, then compare it with other similar properties and email you a report showing comparable sales, and what they sold for. It’s free & comes with no pressure to sell from me. Just friendly help.
Options for investors under mortgage stress
Sell your investment property
If you just can’t fund the repayments it’s better to sell ASAP, than for the bank to take it. If you take this option it’s important to ensure before making any decision you calculate the capital gains and then work out what you will do with the remaining profits.
When selling an investment property here on the Sunshine Coast there is a fair bit to consider. I have written a very detailed article about it which I highly recommend you read here.
I mentioned above best place to start is by having me do a free remote sales appraisal, which you can read all about in an article I have written here.
Refinance
This can help. Annually I do a review on all my loans. One year I saved $19k in interest repayments by refinancing. More recently I saved $12k in interest repayments. But there is a specific strategy I use to ensure I get the very best rates possible, which you can read more about in an article I wrote here.
Access a lump sum of money and put it onto the loan
Win the lotto, get an inheritance, or sell a motorbike or boat. Any extra lump sum funds you come across, putting onto your loan will help reduce loan repayments. Of course, if you have a loan on your principal place of residence that’s where you should be reducing your loan first because its interest is not tax-deductible, whereas an investment property loan interest is. You’ve probably heard of good debt vs bad debt.
Tax depreciation report
I’ve written about this before here. These reports can make a big difference in reducing your costs. I have had some clients be misled by their accountant on these not being worthwhile, so if your accountant has said that get another opinion & read my article about it here.
PAYG withholding variation
It surprises me how few people take advantage of this. Your accountant can pre-calculate the annual tax savings on your investment property. Then your employer can apply for a PAYG variation, which means weekly less tax is taken from your pay & you can use this extra cash to pay your loan down weekly.
If it’s $50 a week that’s an extra $2,000 a year you can pay down your loan. While it doesn’t seem like much, with compounding interest over time it all helps
You can read more about this on the government website here.
Pay your loans weekly
Compounding interest is an amazing thing. You can pay your loan off 5 years faster by paying weekly. Instead of monthly payments. Yes. 5 years sooner.
Here is a simple example.
$500,000 loan
6.25% interest
$3,308 monthly repayments
25-year loan
OR
$500,000 loan
6.25% interest
$763 weekly repayments
25-year loan
$763 weekly loan repayments x 4 is $3,052. Which is $64 a week less than if you paid monthly. By paying the $763 weekly repayments + the $64 weekly you are saving will pay your loan off about 5 years sooner.
What if you are able to get a $ 50-a-week pay withholding variation and you add that to your weekly payments too? That will pay your loan off in about 18 years.
My personal experience though is this. As your loans get smaller, the amount of interest you are paying gets smaller, so it gets easier to pay them off even sooner with extra payments here and there.
With the above example. An $ 80-a-week rental increase would pay your loan off 5 years sooner.
I can help you with this also. I can do a remote rental appraisal as a health check to see if you are getting market rent. Doing these remotely allows me to do them fairly fast without bothering or freaking out your property manager or tenant. Keep in mind this is only for investment properties on the Sunshine Coast
Switch to interest only repayments
Even with investment property loans its best to be paying interest and principal on the loan. Banks do offer the option to pay interest only, which is something they will not offer for ever and usually only 5 years then after that they expect you to start to pay principle too.
The other thing to consider is if you only pay interest only they banks might charge you a higher interest rate. So you really need to shop around to ensure the savings are worth your while.
My advise is if you do switch to interest only if possible only do it for a few years, as ultimatley you would want your invetsment property loan to be paying off the principal too.
Increase the rent
Wouldn’t that be nice? Currently here on the Sunshine Coast, we have hit peak market rent. The market here has even cooled. Yes, there is a rental crisis for properties under $400 per week but most are now more like $700 PW and currently on the Sunshine Coast there isn’t a rental crises at this level.
Right now it’s very likely you are already getting market rent and increasing it further just isn’t possible. But I do still come across some property investors where their property manager has misguided them and their rent is below market. Some as much as $200 PW. But more commonly $80 PW.
Turn the property cash flow positive
Well yeah. That should be the goal of every property investor. I realise there’s a lot of information about investment properties being negatively geared. But the truth is, at some stage, every investor wants to get to a point where their investment property is making them a return. An income. Paying its loan, covering all costs and even giving the property investor an income. Lots of property investors lose sight of this. But it is the ultimate goal.
While I have added this to my list. It’s important to know that first, you should be paying down your home loan as the interest is not tax deductible at all.
Value ad
Recently Kath & I considered renovating one of our investment properties. But we realised that if we spent $80k doing an update, the increase in rental income, the maths just didn’t work out. So we are going to leave it and probably do a major renovation in maybe 5 to 10 years.
Before you spend money updating an investment property you need to do some research if it’s worthwhile. Big ticket items that do add more rent are additional bedrooms. That you can add under the roof line. Kath & I did this to a 3 bedroom investment we own in Buderim which is now 4 bedrooms by making the large lounge room slightly smaller.
Of course maintaining a property is anotehr story. We always address maintenance as it arrises beav use the wose theing you can do is leave maintenance and have a lort of it build up over time.
AirBnB
Kath and I looked into this for one of our properties. Its in a popular tourist area. The maths didnt seem t5o work out for us. Its seemed like we may make a little bit more money but would alos have the inconsicency of it bein empty, the added work of havinfg to deal wth enquitres so we ahve kept it as a traditional retal property.
But you should look into it. The maths might work for you. Itys not something I have expeirnevc with.
One thing to consider is we have had clients come to us who did AirBnB and now prefer to have full time tenants as they toldd us it just wasn’t worth it.
How much have interest rates increased?
Around 4%. In 2021 it was possible to obtain a home loan for under 2%. Loans in 2024 are now around. 6.24%. Well, 6.24% is what I pay via ANZ. Rates will vary depending on people’s circumstances.
What’s scary is when banks elevate a borrower’s lending capacity they add a 3% interest serviceability buffer to ensure if rates rise the borrower can still fund the repayments, so if you applied for a loan in 2021, the bank’s 3% serviceability buffer should have been 4%.
If you apply for a loan now, banks would be doing calculations if you can repay the loan if it was 9%. 3% more than the current rates around 6%
For me, 6% is still low. I’ve been around so long now I remember when rates were 18%, 1%, and 9%. Yes, I know. Houses only cost $80,00 back then, but incomes were lower as well. This is an entire other conversation.
When will rates go down?
Economic specialists are now speculating its possible rates may go down later in 2024. It’s highly unlikely we will see 2% interest rates again in my lifetime. So even if rates do go down I can’t imagine they will fall by all that much to make a big difference for property investors loan repayments. My advice is investors need to do all their budgeting around the current interest rate of 6.24%.
How much have repayments increased?
$500,000 loan with 2% principal interest repayments was $491 per week.
$500,000 loan with 6.24% principal interest repayments are $762 per week.
$271 more a week or $14,092 a year
It is roughly another $300 a week that a property investor needs to come up with rto be able to service the loan
What about Capital Growth? If your investment property is valued at $500,00 and has an annual capital gain of 4% that’s a $20,000 increase. Which is more than the additional $14,092 repayments that need to be made. An investment property with a loan of $800,000 is $784 a week with 2% interest, but a staggering $1,218 a week at 6.24%. $434 more a week or $22,568 a year?
So this property investor needs to find an extra $434 a week to cover the loan repayments.
Annual Capital growth at 4% of a $800,000 property = $32,000
As you can see if investors can manage the additional cash flow the annual capital growth should outstrip the repayments. This of course is assuming the annual capital growth is 4%. Some years it will be less, others more.
Can rental increases cover the investor’s loan repayments?
No, they can’t. That’s a big call I’ve made. Well they can if you bought 10 years ago, or bought recently with a substantial deposit. . The rental market on the Sunshine Coast has recently cooled. Before that, rent increased substantially and is now at an all-time high. Further increases right now are just unaffordable for people living on the Sunshine Coast here in Qld. Wages here are simply not at the level of wages in capital cities.
In real estate, there is a rough concept that if a property sells for $800,00 it should rent for $800pw. I recently sold an apartment in Maroochydore for $655,000 and it’s leased for $625pw. I also just sold a home for $880,000 would rent between $750pw – $800pw. It may achieve $850pw but that would be a stretch. As you can see these rental returns will not cover the loan repayments.
On a $655,00 loan at 6.25%, the weekly repayments are $999. Which is a shortfall of $374 per week. But you also need to cover any maintenance, plus council rates and body corporate fees.
For the $625 per week rent to cover the loan repayment interest rates would have to be an incredibly low 1.75%.
What if you are not under mortgage stress?
Many of the above suggestions are strategies everyone should be implementing to reduce their tax and maximise the returns on their investment property.
You may have other reasons to sell. For examploe the profit form thke sale might be enough to pay off the loan on your princiapole place of resenidece. Your home. Or you may want to move the profits form your investment property into stock.
But if you have no mortgage stress investing in property should be considered for the long term and of you can hold over the yar you will be rewarded with your patience.
In Conclusion
I’m not a financial advisor, accountant or economist. I’m a licensed real estate agent based on the Sunshine Coast Qld. My advice is just my option and you should seek advice from a specialist.
If you own an investment property on the Sunshine Coat and considering selling this is something I do specialist in and I can assist you with. Reach out to me.
