Skyrocketing Interest Rates, What Does It Mean For Renovators?
Rising interest rates can be devastating. But, like most things, it depends on how you view it. So we want to bring some perspective to the current situation and give you tips on how to responsibly continue your renovating for profit journey.
Rising interest rates don’t automatically mean the market will come to a halt. It has been a long time since we had an interest rate hike, and it’s quite a shock. However, you do have to wonder what it means for renovators.
Considering the world is dealing with the war in Ukraine and rising petrol and food prices, the latest increase in the interest rate has had surprisingly little impact on the market.
Interest Rates Since 1970
Let’s look over Australia’s last forty to fifty years of interest rates. In the seventies and eighties, the interest rates fluctuated significantly. And they were high for a large part of those decades.
When Bernadette and Stephen bought their first property in 1985, they were thrilled to get an interest rate capped at 13%. It seems ridiculous now, but that was the economic environment in which they were living.
They also worked on a small development project a few years later, which didn’t go according to plan. Interest rates went up again, the market dropped, and they couldn’t get their price for them.
At the time, Bernadette and Stephen believed they had to sell them. And although they didn’t make a loss on the properties, they didn’t make much profit.
“Knowing what I know now, it was the last thing I would’ve done.”
~ Bernadette Janson
The Market Will Drop
No one can know for sure what will happen with the property market over the next few months. But we are confident it is going to cool off.
So far, property prices haven’t dropped significantly, but they are not as high as they have been. But, to get higher prices, the agents are having to work much harder.
Bernadette was surprised recently when looking at a property in Newtown. It was a warehouse conversion that needed a significant amount of work. But Bernadette believed it had a substantial profit in it.
The guide price was $1.6 million. But a similar property nearby was in slightly better condition and had sold for just over $2 million. So Bernadette adjusted the price she had in her mind to about $2 million, and it was sold to someone else for $2.2 million.
“So, the market has cooled in some areas, but not everywhere.”
~ Bernadette Janson
How To Continue Renovating When Interest Rates Are High
Your mode of operating doesn’t have to change even when interest rates rise, and markets drop. If you are planning to flip your properties, you must always have robust risk management strategies in place to accommodate fluctuations in the market.
Bernadette has had several opportunities to test her theory. The first was in the eighties and then again when she considered the warehouse conversion.
She had three other projects on the go in Sydney at the time. Unfortunately, property prices started dropping when they were about to be put on the market. And they plummeted severely in a matter of months.
So, they put one of their properties up for sale to test the market, to find they would not get their price. In fact, they wouldn’t have been able to cover their purchase price. So, they decided to hold on to the properties, a number one risk management strategy.
You must be willing to hold the project if you are buying, renovating, and selling. If the market changes significantly, it’s your plan B because you only make a loss when you sell the property. So, provided your project feasibility is based on sound principles, you should be able to hold the property until the market recovers.
“I always liken it [over-spending when the market is good] to the offside rule in soccer. You don’t ever want to get in front of the ball. But sometimes, if you get excited about how the market’s going up and think it’s never going to stop, you can end up on the other side of the ball.
~ Bernadette Janson
Make Airbnb Your Plan B
Assuming that the market will follow the interest rates is reasonably safe. So, the market should drop when interest rates rise, and vice versa. The most important thing is to be able to cover your costs.
We have found Airbnb an excellent way to do this when the property market is down. It is better than a long-term rental for a few reasons, including:
- You have more control over the project and keeping it in good condition when you list it as a premium property on Airbnb. Rather than a long-term tenant possibly making your beautiful property grubby, you can check in on the property between guests.
- You can still show the property to prospective buyers even if you want to keep it off the market. You just have to time the viewings between guests.
- You get a much higher rate of return because it’s fully renovated and in premium condition.
If you are in an area that prohibits short-term rental, which is less than three months, you can list your property for a 90-day lease. A minimum listing such as this is an excellent alternative to Airbnb if you cannot list your property with them.
A Financial Buffer Is Essential To Have In Fluctuating Markets
The first step for managing your renovation projects in fluctuating markets is to ensure you do a robust feasibility study. And then you must secure a financial buffer, which is necessary, no matter what you do.
Bernadette’s solution is to set up a credit facility for her renovations, which is secured against the property. Not only does it help finance the project, but it serves as a buffer when the unexpected happens.
It doesn’t have to be in the form of a credit facility; if you are in the position to have cash on-hand, great! But, whatever you do, avoid finding yourself in the situation where you are forced to sell your project.
Use Your Styling Furniture As Extra Income
Owning the furniture you use for styling your renovations adds another source of income to your strategy. You can include it in your short-term rentals and list your premium property as a furnished unit.
If you use a styling company’s furniture when you sell your properties, you can’t use that furniture in a rental property. So, buy your own furniture to increase your flexibility and give you a plan B.
Should You Continue to Renovate Properties For Profit When Interest Rates Are High?
Continuing to buy, renovate and sell properties when prices are low is a strategy you must assess based on your own situation. Your level of experience and appetite for risk are significant determining factors. Anyone going into this strategy must know that it comes with greater risk.
There are other options if you are a bit risk averse. For example, you could consider a micro-development where you buy a property and turn it into three properties. To mitigate the risk and finance the bulk of the project, you would renovate and sell the original house, build two
new investment properties at the back, and hold them.
Although it is an effective risk-management strategy because you are spreading the risk over three properties, subdivisions can present their own problems. But you can effectively manage them.
Mindset For Renovating When The Property Market Is Low
Perspective is key to managing your mindset when interest rates fluctuate. For example, Bernadette was pleased to get an interest rate of 13% in 1985. And now, 7% seems devastating.
Don’t forget to look for opportunities in situations like this. Many people will put their properties on the market, meaning options for you to pick up bargains. Keep your eyes open for properties you wouldn’t usually be able to buy but are selling at a reasonably low price now. .
Conclusion: With The Right Strategies In Place, You Can Continue Renovating When Interest Rates Spike
The continually rising interest rates are having a cooling effect on the market. But, it doesn’t mean you have to give up on your renovating for profit business. Although there are more significant risks involved in buying, renovating, and selling properties in the current financial environment, there are strategies you can put in place to ensure you make it through these turbulent times.
It begins with the project’s feasibility and having a financial buffer. And then ensuring you have a Plan B to carry you through low market prices, enabling you to sell only when the time is right. So, you reduce the risk of losing money.
If you want to meet up with a group of savvy renovators, come over and join the She Renovates Facebook group. It is full of (mostly) women who are working hard to make their dreams a reality, making a great income through renovating for profit.