A combination of historically-low interest rates and high rents in some markets has created a rare opportunity for property investors who target the right locations.
Rarely do the economic fundamentals offer a better opportunity in property. With very low-interest rates available from lenders and relatively high rents in some markets, investors have a rare chance to buy high-growth properties that are positively geared.
In February, the Reserve Bank of Australia cut an already record low interest rate to a cash rate of 2.25 per cent, and many commentators are predicting a further cut soon. This has translated to variable interest rates that are as low as 4.35 per cent in some cases, while five-year fixed rates are around 4.49 per cent from some lenders.
Factoring in high rents in select markets that deliver returns exceeding those low interest rate costs, you can see the picture is bright for smart investors. Now is a great time to buy and, for people with equity in their home or other investment properties, it makes sense to use it to invest in the right areas. You still need to be very selective about where to invest as there are only two capital cities with strong growth forecasts (neither of them being Sydney).
Most home buyers are familiar with negative gearing, which allows people to claim a tax deduction for losses incurred on an investment property at the end of the year, but it only offsets part of the loss. A positively-geared property on the other hand means your rental income exceeds the outgoings on the property, including your mortgage repayments and other expenses. Such a scenario is often difficult to achieve, but with low rates and high rents in certain cities at the moment, there is a chance to generate a decent passive income.
Although most typical cash flow-positive properties deliver low growth, the current interest rate environment has changed the outlook. Investors have the chance to purchase blue-chip properties that would normally be negatively geared. Thanks to the low-interest rates and high rents, they can be positively geared for at least five years through a five-year, fixed-rate loan.
With a conservative growth forecast of 17 per cent over three years in some markets for an average property – and if the property is well selected on the back of good advice from an advisor – investors could hold the property for five years at no cost, while having a very good chance of achieving 20 per cent to 40 per cent growth over that period. On a $500,000 property, such growth translates to $100,000 to $200,000 – a fantastic return, especially if you are using equity in an existing property.
While this opportunity to take advantage of low-interest rates is significant, even if rates rose to, say, seven per cent in the next two years or at the end of a fixed-rate loan you have taken out, the after-tax holding cost is only about $100 a week. So there is a real chance to use equity in current properties at little cost.
The opportunity to positively gear in the current interest rate environment underlines the importance of market research and doing your due diligence before making an investment decision.
This article was originally written by Richard Sheppard for the April 2015 edition of Peninsula Living Magazine.