Seen the news lately? Interest rates might be going up.
Financial markets went crazy after the Reserve Bank said its members had a chat about whether rates are too low. Other nations - like the USA, the EU and Canada - have been raising their rates, and federal banks all over the world tend to both raise and lower their rates in tandem.
The basic takeaway is the RBA reckons there’s a chance interest rates might need to rise over the next couple of years.
But if you’ve tried to buy property in the last year or so you probably know interest rates have been rising already as the Government cracks down on investment lending.
Now, the first response some landlords might have to higher interest rates is to just raise the rent. But that isn’t the best idea.
Just because interest rates increase doesn’t mean the rental market increases by the same amount (or increases at all). There are heaps of factors at play, like the economy of your local area, the types of properties available, employment, wage growth, etc.
Raise the rent too much and your tenants just up and leave.
That said, if you absolutely, 100% need to raise the rent, then be smart about it.
Jump on realestate.com.au first and check out what rent prices are like in your area for similar properties. Remember – your tenants will be doing the same thing, too.
One way you can offset some higher interest costs is by reducing your own. We’ve put together a list of ways you can do just that.
If interest rates are on their way up over the next couple of years, refinancing right now might be a good idea.
I had a chat with Peter Mastroianni, the co-founder of investor-savvy mortgage broking business Loans Only, (which launches next month). He reckons there’s a couple of reasons you might want to look at refinancing:
1. With the government cracking down on investment lending, you want to get in now at the bottom of the interest rate market.
2. Interest-only loans can be a good option to help your cashflow, and again, if rates go up over the next couple of years now’s a good time to shop around. (Be careful, though - interest-only loans typically last for five years, then you have to start paying on the principal.)
3. We’re actually in a super competitive market for lending. There are heaps of non-bank lenders around, so you’re more likely than ever to get a good deal.
That said, if you do refinance there are a couple of things you should know. More banks are putting harsher tests on equity. For instance, if you’re after an interest-only loan you might be subject to a more stringent asset test. More banks are only giving interest-only loans to landlords with an LVR of 80% or less.
Do your homework and don’t just look at the biggest lenders – shop around or even contact an investment broker who can find the best loan for your situation.
Claim more deductions
Are you really taking advantage of all your tax benefits as a landlord? You can claim back things like borrowing expenses, council rates, management costs, cleaning, gardening, advertising for tenants and your insurance as well.
Check the ATO to learn more about what you can deduct. You might find that you’re missing out on some deductions and end up saving some cash anyway.
Go DIY for some improvements
Do you have some small repairs to make around your rental property? Had you been budgeting for someone to come out and do them? Instead, think about doing some DIY jobs. You can pretty much find everything you need to know about small jobs on YouTube, so pocket a few hundred bucks here and there and do it yourself.
In fact, it’s good to know how to do these things yourself anyway – like fixing railings, loose tiles, or even leaks if they pop up. That way, you can do them on your own and not have to constantly pay someone else. You’ll save money and the cost for your materials will still be tax deductible.
You might think, “couldn’t I pay more and claim it at tax time?” Sure. But it’s always better to save money in the first place - so do DIY jobs where you can.
Save on agent fees
You might be surprised that only 56% of rental properties are managed by an agent. With traditional agents being disrupted by technology many savvy landlords are turning away from agents and moving to online tools like Cubbi to save money.
If you add up all the fees and charges incurred by using an agent for things like advertising, inspection fees, letting fees, postage and all the rest you’ll probably notice you’re paying about $2,000+ on agent fees a year.
Offset the rent increase with something else
Have your tenants been asking for something like a pet? Consider offsetting your rent increase by providing one of those things. Again, it comes down to happiness – they’ll be more likely to stick around if you’re flexible on these things.
So why not offer a win-win?
Think about some of the ways you can help make your property feel like a home for your tenants:
- More flexible lease terms - maybe they want a longer lease?
- A new appliance, like a dishwasher
- Letting the tenants have a pet like a dog or cat
- Allow the tenants to paint the walls
- Allow some cosmetic changes, like letting tenants mount a TV on the wall
There’s nothing worse than getting a letter out of the blue saying there’s going to be a rent increase. If you feel up to it, speak with your tenants directly and give them a heads-up that the rent is increasing, but also mention some of the things above to balance it out.
Just be fair
If you’re going to raise the rent, then at least be fair about it. Stick within your state’s guidelines as to what a fair increase is. Be transparent and try to offer something in return.
Most importantly, don’t just rely on rent increases every time an interest rate rise comes along. It’s not a good strategy. If you keep doing it, your rent just gets too high and you’ll never find tenants.
As we mentioned earlier, getting rid of your agent is a great way to save money. At Cubbi we offer an online, transparent platform that helps manage everything including rent collection, repairs and maintenance - all without an agent.
Plus, our fee is still tax deductible, just the same as an agent or property manager!
Want to learn more about how Cubbi works?