Interest Rates Case Study $150,000 Salary
Now that we're in a rate rise environment, we thought it would be worthwhile to look at the point when a rise in interest rates means owning investment property starts to cost you money. And the good news is rates still have a way to go yet before most property tips into a negative cash flow position.
Using a salary of $150 as a baseline, we ran the following analysis.
General Assumptions:
- Salary - $150K
- Property price - $300K & $500K
- Property type - House and High-rise apartment
- Property age – 1 –5 years, 10-20 years, pre 1985
- Loan amount – 80%
- Rental yield – 6% (300k), 5.5% (500K)
- Depreciation – medium standard finish
At What Point Does a Property Become Cashflow Neutral?
| PRICE | $300k house | $300k highrise | $300k house | $300k highrise | $300k house | $300k highrise |
|---|---|---|---|---|---|---|
| AGE OF PROPERTY | 1-5 years old | 1-5 years old |
10-20 years old | 10-20 years old | Pre-1985 | Pre-1985 |
| SALARY | $150k | $150k | $150k | $150k | $150k | $150k |
| YIELD | 6% | 6% | 6% | 6% | 6% | 6% |
| EXPENSES* | 0.50% | 1.00% | 1.00% | 1.00% | 1.00% | 1.50% |
| DEPRECIATION | 9,000 | 9,000 | 7,000 | 8,000 | 3,000 | 3,000 |
| INTEREST RATE TURNING POINT WHEN PROPERTY CASHFLOW NEUTRAL | ||||||
| 9.00% | 8.50% | 8.00% | 8.25% | 7.00% | 6.25% | |
| PRICE | $500k house | $500k highrise | $500k house | $500k highrise | $500k house | $500k highrise |
|---|---|---|---|---|---|---|
| AGE OF PROPERTY | 1-5 years old | 1-5 years old |
10-20 years old | 10-20 years old | Pre-1985 | Pre-1985 |
| SALARY | $150k | $150k | $150k | $150k | $150k | $150k |
| YIELD | 5.50% | 5.50% | 5.50% | 5.50% | 5.50% | 5.50% |
| EXPENSES* | 0.50% | 1.00% | 1.00% | 1.00% | 1.00% | 1.50% |
| DEPRECIATION | 12,000 | 13,000 | 9,000 | 10,000 | 4,000 | 4,000 |
| INTEREST RATE TURNING POINT WHEN PROPERTY CASHFLOW NEUTRAL | ||||||
| 8.00% | 7.50% | 7.00% | 7.00% | 6.00% | 5.50% | |
* Expenses have been expressed a percentage of the purchase price. For example, a $300k purchase price with a 1% expense ratio has been calculated at $3k.
What the results reveal?
- Lower priced property built after 1985 will continue to be cashflow positive at best and cashflow neutral at worse.
- Newer property will be less affected by the interest rate rises due the positive benefits of depreciation.
- Lower priced property will be less affected by the interest rate rises for two reasons:
- Lower priced property tends to have a higher yield ratio in relation to the purchase price.
- Lower priced property tends to have a higher depreciation ratio in relation to the purchase price. (This is a whole separate article as to why!).
- Those on a higher tax bracket will be less affected by the increase in interest rates due to the fact that negative gearing works better for those on higher tax brackets.
- First Home Buyers won’t have the benefit of the deductible interest payments and depreciation – and may hurt more than investors.