More and more property investors are enquiring with us about short-term rentals and how we can help them to maximise their rental yield. Some are even coming to us before buying an investment property seeking assurances that short-term rentals will deliver higher returns.
Investment portfolios have grown strongly in the last few years due to persistently low interest rates, however, this is tipped to change in the near future, potentially exposing investment property owners to increases in their loan repayments.
So what does this mean for investors with short-term rentals properties? How can they best prepare for the coming upturn? Mozo's Steve Jovcevski has given us his three top insider tips.
As a property investor, your priority is probably to maximise the rental return of your investments, and short stay arrangements can be a great way to do that. However, a smart investor also keeps a careful eye on costs - which, for many investors, means being able to handle the cost of a mortgage now, as well as in a year or two when rates are likely to be higher.
At the moment, interest rates are at record lows - but that can’t last forever. Interest rates have been tipped to rise in the next year or so, and already lenders are hiking interest-only home loan rates left, right and centre.
That means it’s now more important than ever to safeguard your budget against higher mortgage repayments, particularly if you’re getting into a short stay arrangement where rental income may vary more from one week to the next compared to a long-term lease.
Here are three things you can do to make sure you’re safe in the face of coming rate rises.
Factor a rate rise into your budget.The upside of short stay rentals is that you can net serious profits. However, if you’re making mortgage repayments, you need to be sure that your monthly income will cover that cost, even if rates rise in the future.
So, say your repayments are around $3,000 a month and you need to have your property rented out at least 60% of the time to cover that cost. In order to be prepared for rising interest rates, work out what your repayments might be if rates went up by, for example 2%, and what your occupancy rate would need to be to meet them - it might be more like 70%. Make sure that’s a realistic goal, so you're not left scrabbling for funds to repay your mortgage in a year or two.
Fix part of your loan.By fixing a portion of your loan at a set interest rate, you can ensure that you’ll be comfortable with a certain monthly repayment, no matter what market rates do. This is a good strategy if you’re looking at short-term leasing your property, because you can plan a monthly budget despite seasonal variations in income.
So why not just opt for a fixed rate loan? Having a small part of your loan - say 20%-30% - on a variable rate will give you access to features like an offset account, which can be worth its weight in gold when it comes to saving on interest.
Opt for principal and interest repayments.Lately, interest-only rates have been rising, while principal and interest home loans have been seeing some rate cuts. So if you’ve got an interest-only home loan, as many property investors do, then now may be a good time to reassess that situation.
You’ll need to carefully examine your monthly budget and consider the average income you can expect from your property, because P&I repayments can be as much as 30%-40% higher. But with lower rates on offer and because you’ll be chipping away at your loan principal, there could be considerable savings in the long run.
If you do stick with an interest-only loan, be prepared for the fact that with APRA regulations in full force, your lender may not be willing to roll it over into a new term after your initial interest-only period ends. So it’s a good idea to plan your budget to handle the higher cost of principal and interest repayments at that point, just in case.
By Steve Jovcevski
Steve is a property investment and lending expert at financial comparison website mozo.com.au. With an extensive knowledge of home loan products and property trends, Steve is full of practical tips to help investors build and get the most out of their property portfolio.
MadeComfy provides an end-to-end property management service, which means property owners don’t need to do a thing when they hand over their keys. MadeComfy makes the process of earning greater returns from short-term renting effortless, consistently achieving occupancy rates of over 70% and delivering returns over 40% higher than long-term rentals and self-managed Airbnb listings. Get in touch with us today to see how we can help!