HARVESTING PROPERTY INVESTMENT PROFIT WHEN INTEREST RATES ARE HIGH

27.07.2023 By: John Penquet

It’s never been easier to make profit from property investing!

Now before you shoot me down, please bear with me while I explain.

Since 2008, property investors have been handsomely rewarded by high cashflow strategies.

With interest rates low, the gaps between costs of borrowing (interest rates) and cashflow (the yield of a property) was quite wide. This gap was your profit.

What many forgot during this time was that you also made money from price inflation. As your investment increased in value, you also profited from capital appreciation. This was not a significant consideration as the rate of house price growth was relatively modest.

So, your gross investment profit was:

CASHFLOW – COSTS + CAPITAL APPRECIATION

On a typical buy to let this looked a bit like this:

Example 1

£100,000 property, 75% LTV 3% interest mortgage, £700pcm rent, house price rise 2% per year

Annual Rent – Mortgage - Insurance & repairs + increase in property value = PROFIT

So: £8,400 - £2,250 - £1,000 + £2,000 = £7,150 PROFIT

Then, the market shifted. No more cheap deals, much higher mortgage costs and the pain of supply shortages

Now let’s look again, and take the same price property but apply some figures we see today:

Example 2

£100,000 property, 75% LTV 6% interest Mortgage, £700pcm rent, house price rise 9% per year

Annual Rent – Mortgage - Insurance & repairs + increase in property value = PROFIT

So: £8,400 - £4500 - £1,000 + £9,000 = £11,900 PROFIT

As you can see, despite the mortgage going from 3% interest to 6% interest, the overall annual earnings (profit) have grown almost £5,000 or up by 60%

This is why the property market is still so appealing, and why many institutions are investing in our space. The returns are far greater today than ever before.

Now there is a catch or two.

1 The first one is access to finance. In the past, mortgages stacked because the cashflow from rents made affordability stress tests easier to achieve. In recent months this has changed. Many investors are falling foul of stress tests. While it is a little early to predict, there are signs of a relaxation in recent measures for lending more generally. Recent examples are 100% LTV mortgages for renters, a return of the same day revaluation mortgage and new marathon mortgages of up to 40 years. At times in the past when this happened, easier access and terms filtered into investment and buy to let mortgages.

2 The next catch is can you afford it. The great thing about cashflow is it delivered your profit immediately and frequently. With asset and rental appreciation, it takes time and can be a bit lumpy. SO whilst you’re making more, you can’t spend it each month until you have scaled your portfolio.

But this is just temporary, right?

Not really. What we actually have now is a return to normality. The average interest rate for the preceding 20 years before the credit crunch was 5%, and in the 20 years before that it was 9%. So rates are still, historically low.

But won’t high interest rates crash property prices?

This drives me crazy. Almost every armchair pundit shouts about how interest rates control house prices. They don’t, and they rarely ever have. As a trend for the past 40 years, interest rates have often responded to house price growth or fall, but have not caused it. Its another of those urban myths that seem to just be accepted.

Check out this chart to show historic interest rates and historic house price growth to see for yourself:

Source: ONS

Remember:

Interest rates respond to house price change, they do not cause it

So, what should you do?

Righty now, investors need to consolidate their experience, training and education and get their business plans aligned to the new high inflation, high interest rate cycle.

This is just like being a farmer – you must gather your tools and your resources together.

Next, you need to select where and how to farm, just like selecting your fields for planting.

Next you need to prepare your crop – being in the right place, with the right strategy at the right time.

I talk at length about this with my business partners, friends and investors I meet. In fact, it’s pretty much all I talk about at the moment.

Remember, there is no success without sound research and evidence. And efficiency in all of this is essential. That’s why UPD was created – to solve this for you, and can be seen and tried for free here:

www.upd.ai

Remember, successful property investment requires facts rather than opinions. Make sure you have what you need.

John Penquet

Market Data Expert

Here we outline how you canadd the senders email address to your safe sender list or ‘whitelist’for the most common email providers.

Outlook Users

Open the email from the sender you would like to add to the safelist. Click on the "Junk" link next to the delete button in the top left corner. Click on “Never Block Sender" in the drop-down options below the ‘Junk’ icon. Their email message will be automatically added to your Outlook safe senders list.

Outlook (Web Version) Users

Once logged in, click on the cog in the top right-hand side of your inbox. Click on “Safe Senders” under the “Mail” tab. Open the email from the sender you would like to add to the safelist. Enter the email address of the sender and click the plus sign. Your sender will be automatically added to your Outlook safe senders list.

Apple Mail

Open the email from the sender you would like to add to the safelist. Click on the sender’s email address at the top of the email. A list of options will appear on a drop down. Click on “Add to Address Book” Your sender will be automatically added to your Apple Mail safe senders list.

Gmail® Users

Open the email from the sender you would like to add to the safelist. Click on the arrow next to an email icon on the far right. Select “Add To Contacts”. You will see the text “Added *Email Address* to contacts.” Appear at the top of the screen, meaning your new contact has been added to your Gmail Safe senders list.

Via an iPhone/iPad

Open the email from the sender you would like to add to the safelist. Tap the sender's name in the “From” line. On the next screen, tap “Create New Contact”. Add the details of the email sender (the email will be populated otherwise you will need to add the sender’s other details, name, address etc) Tap “Done”.

Via an Android Phone

Tap to open the email from the sender you would like to add to the safelist. Tap the icon next to the email address on the left-hand side. Tap “Create contact”. Add the details of the email sender (the email will be populated otherwise you will need to add the sender’s other details, name, address etc). Tap “save”.