22-year-old real estate investor fears interest rate rise

Melburnian, 22, bought not one but two investment properties last year and planned to put another $1 million into real estate by 2022.

But then interest rates started to rise.

Mr. Kouts did not set his mortgage rate as the young investor planned to dive into the equity of his existing properties to buy more – which made it a lot more practical to stay on a variable rate.

But after the Reserve Bank of Australia (RBA) raises interest rates by 50 basis points on Tuesday, which brought the official rate to 1.35 percent, Mr. Kouts is now reconsidering his plan.

“It’s clearly not the most ideal situation,” he told news.com.au.

Mr. Kouts’ real estate portfolio is around $1 million, meaning he will pay an additional $300 per month after Tuesday afternoon’s announcement.

For a borrower with a $1 million mortgage, the July increase adds $273 to their monthly repayments, bringing their total increase since April to $665 per month, according to RateCity.

He now says he is now considering switching to interest-only interest to better cope with the change in his finances and may also need to raise his rent.

During the pandemic, RBA Governor Philip Lowe didn’t expect a rate hike until 2024 — something many real estate investors, including Mr. Kouts, were counting on.

But in May, the RBA took the step of raising interest rates for the first time in 12 years, and after its last two monthly meetings since then, has done the same.

The third consecutive increase of 50 basis points for June is the largest increase since February 2002 and follows a 25 basis points increase in May.

The number of Australians suffering “mortgage stress” is set to skyrocket, especially for those who entered the market between November 2020 and May this year, when interest rates hit a record low of 0.1 percent.

And July’s rise won’t be the last, with experts predicting a 2 percent spot rate by the end of the year.

Almost one in three Aussies who borrow or rent say they cannot afford housing costs if the Reserve Bank raises interest rates by as much as expected in the coming months.

Mr Kouts admitted that he did not expect interest rates to rise so quickly, but he knew it was a risk if he wanted to invest in the real estate space.

“All investors can do is take it as they come and ride the waves, that’s all you can really do.

“It always goes up and down, people panic very quickly. The alternative is to simply not invest because interest rates are going to rise.”

Mr. Kouts has been working at a real estate investment company since he was in his senior year of college and saw others entering the market, so he wanted to follow suit.

He set himself the goal of owning two properties by the time he turned 22, but didn’t realize that an interest rate hike was so close to the horizon.

In May last year, he bought a four-bedroom, two-bathroom house on the outskirts of Melbourne for $467,000.

With a salary that hit the six-figure mark, the aspiring real estate investor — who lives at home with his parents — was able to take out a loan from his bank and also pay a 10 percent down payment as well as mortgage insurance for lenders.

Two months later, in July last year, he scored his second property, this time in Ipswich, Queensland, for $485,000.

Since his purchases, the combined value of his real estate portfolio currently stands at $1.2 million after the gains the market posted last year. However, real estate is expected to decline in value in the coming months.

While Queensland ownership remains positive, the Victorian property is now cash flow negative.

He is currently in talks with his broker to see how he could switch to an interest-only payment plan.

“I tend to stick to variable rates and that way I don’t have to break fixed rates,” explains Mr. Kouts. “It has obviously come at a higher cost to get that into equity (sometime in the future).”

He stands by his decision, however, because otherwise he claims he would have “dead money” in his properties.

“I’m willing to take that money out of my pocket to build equity,” he said.

The 22-year-old added: “I have a very, very strict budgeting system, I just don’t spend that much.”

Even with his money-saving system, the rising cost of living and this new mortgage crisis have made it harder than before to pay his bills.

To save himself money later when he has more investment properties, Mr. Kouts plans to sign up with an Australian app called RentBetter.

It is a self-service real estate management platform that reduces costs by cutting the costs of real estate and property managers.

The company claims to save the average landlord $2,000 a year on every property they own.

For mortgage holders across the country, every dollar counts right now.