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Why the interest rate hike could actually help you become rich!

by , 31 January 2014

“Francois, the economy isn't doing well and now interest rates have just gone up - does this mean that rental property is a high risk investment?”

I'm sure the same thought crossed your mind after Reserve Bank governor, Gill Marcus, announced an interest rate hike on Wednesday 29 January.

But I believe this rate hike and the other ones that are coming in the near future shouldn’t affect you as a property investor.

In fact, if you're prudent today – rate hikes may even help you going forward… Let me explain:

Three reasons why the interest rate hike doesn’t matter to your property investment and why it could be good for you!

1.    No matter what the interest rate is – People need houses!

It’s simple – people need a place to live and a simple interest rate hike won’t change that. But with interest rates swinging upward from all-time lows now it’s sure to affect the affordability of owning a home. This simply means that more people will rent as interest rates hike instead of buying.

So demand for the rental properties you already own will actually increase…

2.    Rising rates could help you pick up serious bargains – if you’ve got some cash on hand…

If there’s one thing that’s sure it’s the fact that people ALWAYS tend to buy the most expensive house they can possibly afford.

And this means that when interest rates start to rise they get themselves into trouble with repayments.

Now mark my word: Another interest rate hike or two and we’ll see some more properties hit the auction market, bringing bargains to all those that are ready to scoop them up.

Now I don’t like profiting from other people’s hardships. But I’ve got my cash stash ready to pick up a bargain or two from Sherriff auctions this year.

3.    You have ‘built-in’ protection against rising interest rates as a property investor!

If you own a house to live in rising interest rates only mean one thing – you pay more in bond repayments.

If you own a property that you lease out things are different. If you have any kind of decent contract in place there should be a clause in there to escalate your rent annually.

This means that you can at least ask some more rent from your tenant to cover the higher repayment.

True, if interest rates rise as rapidly as they did in 2008 you won’t be able to increase rent by as much, but at least you’ll be covered better than someone just living in their house…

The best time to buy more property is coming again…

If you haven’t invested in rental property yet – don’t rush out to buy now that interest rates are turning up. You’ve missed the opportunity to capitalise on low interest rates in the past five years.
But you might just have a better opportunity coming.

As I said, I believe we’ll see more properties hit the auction market as bank repossessed properties while interest rates rise. But it’ll also put some pressure on property prices in the short term – and you could get very good deals.

So what I would suggest you do is make sure you build up a nice cash stash this year – because by year end or early 2015 the property market will be ripe for the picking!

Here’s to unleashing real value

Francois Joubert

Chief Investment Strategist, Red Hot Penny Shares

Why the interest rate hike could actually help you become rich!
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