That’s what I was thinking earlier this week when Glen Stevens kept interest rates the same – no change.
Damn it I thought – why doesn’t the guy just get it over with and do it?
I’m actually looking to start a Facebook Group called, “Pro Interest Rate Rise” – am I crazy? mad? lost the plot?
…maybe. This will make sense to you as you read this email.
I don’t know about you, but there seems to be a lot of noise, concern and fear about interest rates at the moment – are you sensing that?
I’m talking mainly about the real estate market of course.
If you stand back and look at it from a subjective point of view, it really is a laughable situation.
Right now interest rates are at a 49-year low.
That is a significant fact.
So let’s say interest rates go up by a HUGE 1%… which isn’t going to happen straight away, but it might happen in the next 12 months.
Well, interest rates will now be at effectively a 20-year low.
Are you starting to get the picture? No? Keep reading, you will…
I know some of you will correct me on my maths, but here’s the point that I want to drive home.
When interest rates are low, it’s time to accumulate.
Accumulate what? Property of course – sorry to state the obvious.
There’s no point looking back in 3 years time and saying, “I wish I had…”
The average interest rate over the last 20 years has been around 8%, and experienced real estate investors (my multi-millionaire friends) are always confident about the market when the cost of money is less than 10%.
So why all the fear and uncertainty?
Well, firstly it creates headlines and sells newspapers.
Secondly, many investors have never experienced an environment like this before.
However, if you’re a fair-dinkum real estate investor you should be well into your accumulation stage or at least getting serious right now.
Let me take you back in history…
I remember a similar time when I first started investing around 1993. We had just come out of a recession, it was “the recession we had to have.”
Remember that statement?
Leading up to that period, the interest rates were a crazy 16.5%, and I remember clearly as the interest rates kept rising through the 1989-91 period property prices kept rising.
The fear back then was that if they didn’t buy then, they were going to be locked out of the market forever.
Here’s how real that fear was. I locked in a rate on one of my loans at 13.5%! I was laughing when it went to 16.5%, but kicking myself when it shot back down to 8% within 12 months.
A bit of a lesson there about fixing interest rates.
Anyway, I’m not saying that interest rates rising will push the market higher, but if you look historically, you shouldn’t be concerned right now with an increase rates especially at these historical lows.
In fact, you should be taking my point of view and joining my Facebook group, “Pro Interest Rate Rise.”
…so back to 1993.
Interest rates had come from their all-time highs down to around 6.5%. This was the time to accumulate hard assets like real estate.
The period between 1993 and 1999 saw the value of real estate not double but almost triple in some cases.
I’ll give you a quick example…
I bought in Brunswick (an inner-city suburb of Melbourne), a single-front 2 bedroom house for $104,000.
It was 1995, by 2003 I sold it for $327,000.
Good deal? No… I was an idiot. Today it’s probably worth $450,000 – $500,000.
I’m telling you all this because history repeats itself and experience teaches you life’s lessons.
Since 1993, I’ve transacted over $17,000,000.00 in real estate and currently sit on a portfolio that sits around $9,000,000.00.
So I think I know a thing or two about real estate, but I’m always learning.
I don’t care if interest rates go up, in fact I hope they do. And if you’re a smart real estate investor – you should too.
Here’s my next 6-12 month prediction…
Interest rates WILL go up, probably around 1%. This will spook the marginal new home owners who are currently feeding off the low interest rate climate and the free money from the government.
These guys will pull back from buying new homes because they will be afraid that they wont be able to afford the mortgage in the future as interest rates continue to rise and probably stop around 8%.
Many of the owner/occupier buyers will also be unable to buy because of the fact they wont have the generosity of the government helping them out with the deposit.
So what does that mean?
Well, the ones who can’t buy (who could 6 months ago), will all have to rent.
Vacancy rates have eased up a bit because of the above phenomena, however they’ll go back to all-time lows in the next 6-12 months. New projects wont come on online in a hurry, the banks are super-cautious when it comes to lending money to property developers (I know several developer friends who are peeved off big-time now with the microscopic intrusions of their lenders).
So stock will be tight.
Perfect environment for investors who are smart enough to recognise this and start to accumulate.
I’ll be one of those. Are you going to join me?
Here’s one more thing before I go…
And that was the question I asked in one of my recent essays…
How many income streams does one single property have?
Novice property investor only really see one… That’s why they stay at the beginners level for too long.
There is actually up to 4 income streams for every individual property.
Here are the 4…
The first two are obvious and always present (or at least they should be, especially the growth part).
The rent you receive.
The capital growth that you get over time. This can actually be a lot more than the rent. The best part, it happens while you sleep.
Depreciation. Many new properties qualify for this. The beauty is that you don’t have spend money out of your pocket to get money back. The government just gives it to you if you do it right.
Tax concessions. Again the government comes to the rescue and helps you out if you have a loss on your real estate. Now I’m not an advocate for negative gearing, but if you’re paying tax at the end of the year and getting nothing for it then it makes a lot of sense to build a property portfolio – at least you get some of that dead-money working for you.
Put all the four factors together over time and you’ll get the best and safest return on your investment dollar – period.