How do investors cover high interest rates?

[zoltanwise]

Hi I`m new to Property Investing and was wondering what happens when intrest rates in the future go up say like they did in the early 80s?
When they are like 18% did a lot of landlords/investors get burned?
Did they just raise rents as rates increased to cover cash flow?
I`m guessing there would be way more renters in this situation which is good but how do you protect your cash flow way down the road?

sorry if it`s a stupid question.
KP

 

[Thomas Beyer]

QUOTE (zoltanwise @ Mar 5 2009, 09:32 AM) Hi I`m new to Property Investing and was wondering what happens when intrest rates in the future go up say like they did in the early 80s? When they are like 18% did a lot of landlords/investors get burned?
they won`t be double digit .. as this situation was during a baby boomer fuelled ROARING economy which is likely not happening again for a few decades !

If you believe it will happen again you do not want to have a mortgage or debt coming due then ... so if you honestly believe it will happen then a very low to no mortgage is the only way to go for you .. or an investment in the US with a 30 year fixed mortgage at 5.5% or so (as we do not have this in Canada) !

QUOTE (zoltanwise @ Mar 5 2009, 09:32 AM) Did they just raise rents as rates increased to cover cash flow?
I`m guessing there would be way more renters in this situation which is good but how do you protect your cash flow way down the road?
You raise rents to market in ANY CASE .. regardless of cost .. why would I rent an apartment for $650 today if I could get $2000 ? Because the market doesn`t support it.

 

[Dan_Eisenhauer]

When rates were that high, the LVR was low, and CAP rates were very high. Income properties did support the mortgage payments. The pendulum has swung back into the same direction, even with low rates. CAP rates are climbing... thankfully, not as high as in the `80s... and banks are dictating lower LVRs. (I recall how well we thought we were doing when mortgage rates were 12%.)

If you have a low rate today, and rates begin to climb again, you will not have has much cash left over at the end of the day. Hopefully, your rents will increase to cover the higher rates WHEN they come.

This will affect you if you own a property where the value is determined by its cash flow and you want to sell or refinance it. Its value will not be as high as it would be with lower CAP rates. One property I managed had its value drop $200,000 within 6 months because of increasing CAP rates.