Updated: Mar 22
Article by Emile Grobbelaar
It seemed like a lifetime ago when our interest rate was at 7% prime. Then, we were acquiring new development properties all the time instead of second-hand properties. The new development properties were cashflow positive at the time, apart from the advantages of the superior capital growth and the option of a Section 13sex tax claim on those properties.
Fast forward a few months, and our prime interest rate is sitting at 10.5% following another "jumbo" interest rate hike. Still, there are indications that it will rise even more in the coming months. The interest rate increases negatively affected the cash flow of the properties we acquired when the interest rate was only 7% Prime. The increases now mean the owner needs to start paying money into the property portfolio monthly because the rent is insufficient to cover all the property accounts.
There needs to be more done by property owners/investors to combat the increased shortfalls getting created by the rising interest rate, and many will consider selling properties rather than exploring other avenues.
Our longstanding members will know by now that where there is a problem, Wealth Masters will find a solution.
Consider the following strategies to combat your ailing cashflow:
Acquiring a Positive Cash Flow Property
Finding a positive cash flow property in the current market takes a lot of work to find the right property, but the strategy is simple enough. You will need to get a bond, have cash for a deposit and costs, and make provision, in your future cashflow planning of the property, for higher interest rates on your bond repayments.
Refinance to Settle a Bond
Refinancing a property will increase your monthly bond repayment; therefore, your cash flow will worsen. Usually, we will use the refinanced money to acquire another property, which an investor can still do for the above strategy. Still, it can get used for settling another bond, especially if you need more affordability. The increased bond repayment of the refinanced property will be less than the instalment of another bond. So, your cash flow will move into the positive if you settle a bond with the refinanced money.
Tip: When you refinance with your bank, use this opportunity to negotiate a better interest rate or longer term on your bond. You can decrease your monthly instalment and increase your cash flow.
Implementing the "sexiest" tax incentive
Only some investors realise that SARS has an incredible incentive for investors, allowing you to claim 55% of the purchase price of the properties over 20 years. Many people take a long time to acquire the minimum five properties required for this strategy and need to remember to implement this when they buy their fifth property. Remind your accountant about this strategy and ensure it gets used. It positively affects your cash flow for a very long time.
Increase the Bond Term
Most bonds get granted a 20-year term. The banks are very lenient when their clients request to increase their bond terms, and they usually do so without much hassle. A bond with a more extended period will decrease your monthly bond instalment and, therefore, will positively affect your cash flow.
Ensure to Escalate your Rent
This strategy is often not used correctly. Many property owners are too lenient on this when they have good tenants. I agree that a good tenant is "gold" for an investor, and I would rather keep a good tenant than escalate the rent and lose them. However, you need to keep up with the market rental rate for your benefit, and especially if you have been lenient for several years, it is time to do a proper escalation to solve your cash flow problem.
Property owners usually lose touch with the market rental rates when tenants rent for many years. They do the yearly escalation but are not market related. So, after a few years, their monthly rent is well below what it should be, and they lose money without realising it.
Depending on the area where the property is, which will determine your rent escalation percentage, and the total increase of the interest rate in a year, the rent escalation usually covers the increase of the bond amount every year.
Selling a Property
This is NOT a strategy!
You should get a good amount of capital out of the sales transaction and use that money to settle another bond, and you will get the advantage of not having to pay those bonds. However, you can achieve the strategy mentioned in point two above without losing a property from your portfolio, which is more valuable.
The only advantage of selling a property is getting rid of debt but sacrificing an asset. It is vital to assess the cash flow of your portfolio regularly, especially when we are in a period like now, where the prime interest rate is being increased more frequently than usual. Keeping a handle on your cash flow will allow you to act early enough and prevent getting into cash flow problems.
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