Interest Rates and ROI 2
Continuing on from the question on interest rates, here we try to answer the questions of the listings in October, if rates for loans reach 6.5%, how much increase is the actual interest expense per project, and how much would the interest expense / net operating income ratio increase by?
For projects between 2mAUD – 5mAUD, an increase of interest rates from 4.5% to 6.5% increases the interest expense from a mean average of $91,449 per annum to $132,094 per annum (graphic 2). In terms of interest expense / net operating income, that’s an increase of 31% to 45% (graphic 1). As a reminder that’s with the LVR at 70% and assuming interest only payments for the first three years, which is quite standard in the industry (as of current).
Having said that, we have not accounted for the increase in rental income arising because of the increasing interest rates and property managers boost rental income to assist owners in offsetting rising mortgage rates. According to Ray white, https://lnkd.in/gWndRf3N they seem to be gearing to increase rents by at least 20% in December and given such high demand and low vacancy rates (below 1%), that tenants would be forced to accept such increase. Meanwhile according to https://lnkd.in/gj4yMcAn rents have risen 16.9% year on year for houses and 12.5% for units.
So ultimately, whilst interest rate increases will hit the bottom line and affect ROI, rising rents mitigate and cushion some of that effect for management rights investors.
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