7 Strategies To Manage Your Investment Property Top Up

Interest rates are surging, which means more properties are negatively geared, and investors will need to top up their investment properties – at least for the short term. These are the 7 strategies you can use to free up cash flow and manage the difference.

Date Published: 19/05/22

LM b W

Laine Moger

Journalist and Property Educator for 6 Years
Introduction

Often the rental income from a property won’t cover the mortgage and all the costs to run it. This is especially true for recently acquired investment properties.

That means investors have to contribute some of their own money to “top-up” the property and cover the cashflow shortfall.

 

If you’re a property investor, it’s likely you may be comfortable with having to contribute a top-up to your investment property.

But, since interest rates are rising, these top ups will increase. Some investors will find these higher top-ups a stretch.

So, in this article, you’ll learn 7 strategies to improve your cashflow over the short term as interest rates spike.

What Is Negative Gearing?

What Is Negative Gearing?

The term negative gearing is a piece of jargon commonly used in property investor circles.

All it means is you have a cashflow shortfall between what the property makes in rent and the property’s costs/expenses.

For instance, let’s say your rental property makes $25,000 in rent each year, but your expenses tally to $30,000.

topping up property investment

This means your property is negatively geared by $5000. So, you as the investor will have to contribute the shortfall out of your own pocket. This is known as “topping up”.

So, let’s say you borrow the deposit for an investment property against your own home and you buy an investment property with 100% lending. As the biggest expense you have in investment is the cost of your mortgage, it’s likely your property will be negatively geared – especially at today’s interest rates.

Read our full article for a more in depth analysis of negative-gearing.

How Much Will I Have To Top Up?

How Much Will I Have To Top Up An Investment Property?

Let’s go through an example of a property where an investor would need to top up the cashflow.


In today’s market, a 2-bed townhouse in Auckland might cost $769,000, with another $3,000 allowed for legal and other set up costs. That means you’ll borrow $772,000 from the bank in total (100% lending).

This property rents for $600 a week, with 2 weeks allowed for vacancy, and then takeaway all the expenses like tax, rates, insurance.

Here is what the weekly cashflow would look like:

For this property the average top up is $145 a week for the first 9 years, while the property is negatively geared.

But the projected top-up is different each year. This is primarily driven by changing interest rates.

For Year 1, the projected interest rate is 4.5%. This is projected to rise to 5.25% for Year 2 (next year, 2023), then to 5% in Year 3 (2024), before coming down.

In dollar amounts, the first year’s top up is $67 a week. This jumps to over $300 a week in Year 2, before slowly coming down.

So now, let’s go through the 7 strategies to manage these higher than average top ups.

What Are The 7 Strategies?

What Strategies Are There For Managing A Higher Top Up?

So, if you’re on the verge of buying an investment property, or if you bought one when interest rates were low, you may need to use one of these 7 strategies to manage your top-up.

Strategy #1 Use A Revolving Credit

The first strategy is to use a revolving credit to debt-finance your investment top-ups.

In short, you use the bank’s money to pay for the top-up.

Handily, this you can see how much of a revolving credit you need as part of the latest version of our Return on Investment calculator

LVR restrictions on investment properties

Essentially, a revolving credit is where a small part of your mortgage acts like an overdraft.

If you pay money into this account, you reduce the interest you’re charged. But, like an overdraft, you can also take that money out at any time.

So within this option, you can set up a small revolving credit, and then use the money to cover a portion of your top up.

Take the example of the Auckland property above. If you just wanted to pay the average top-up of $145 a week, then you would need a $23k revolving credit to smooth out the cash flow.

Yup, we hear you.

“You’re suggesting we use debt to finance the cost of other debt?”

Under this option you will pay off your revolving credit as the cashflow on the property improved. You’re only using this financing option to weather the storm through tougher times.

In this example, the revolving credit is completely paid back by Year 12 that’s all paid off.

#2 Reduce Your Personal Mortgage Payments

The second strategy is to reduce the amount you pay on your personal home loan. This works if you are paying down your mortgage at a faster rate than you need to. i.e. you are making payments above the minimums required by the bank.

Doing this frees up more cash, which you can put towards your investment properties.

To be fair, this differs from what we often say in other articles, where we suggest that you pay down your personal debt as quickly as possible.

Turnkey properties in nz

But remember, this is only for the short term as interest rates rise and your investment property’s top up increases.

Once interest rates fall again, you’ll have more cash available to attack your mortgage.

For instance, let’s say if you are paying $1500 a fortnight towards your mortgage and you are paying above the minimum amount.

If you can reduce it to $1300, that allows you to divert that extra $200 a week towards your investment property.

You might say … “but for this to work, I need to already be paying more than the minimum amount towards my mortgage?”

That’s true.

But the majority of New Zealanders are already ahead of where they need to be on their mortgage … especially those who have had it for a while.

In fact, 68% of borrowers have paid off more than the minimum required, according to Westpac.

This happens because many people increase their mortgage repayments as their salary goes up. So, there may be an option here. If you need it, take it.

#3 Start Putting Money Away Earlier

Interest rates are going to rise. And properties will become more negatively geared for a short time.

So, if you’re currently out shopping for an investment property, start squirrelling away some of that potential top up now.

For instance, if you reckon you can afford $150 a week to put towards a top up, put that in an account now.

That way, when you put a property under contract in 3 or 6 months, you already have money there to see you through some of the more expensive top-up years ahead.

#4 Reduce Your Kiwisaver Contributions

If you are paying more towards your Kiwisaver than you need to, it might be an idea to reduce this amount for a short while.

For instance, let’s say you’re contributing 8% or your pay to your KiwiSaver and your employer is putting in 3%.

This means you’re putting away an extra 5% of your salary into a fund, which you can’t access.

LVR nz

So, if you reduce your contributions by 5%, you can free up some of that money to go towards other investments like property, while interest rates are higher.

It can make a big difference.

For instance, if you are on $100K, this move could hand you an extra $100 a week to put towards your investment.

There is also the option to put your contributions on pause, but speak to your financial advisor to see if this the right option for you.

#5 Find Ways To Increase Your Income

Here at Opes, we call this strategy the “Earn, Baby, Earn”. It’s all about increasing your income, not just over the short term.

There are two ways you can do this:

First, if you’ve already owned a property for a while, the rent you’re charging may be below the current market level.

That’s especially the case since rents are rising quickly right now. According to the TradeMe rental price index, rents have increased 6.5% (March 2021 – March 2022).

Though there is variation around the country. For instance, rents in Taranaki are up 17.8% year-on-year.

Whereas in Otago, rents are only up 2.0%.

So check out the map below to see how much rents have increased in your area.

If you want some advice on how to increase your rents, we have a full article on the Right Rents system here.

The second way to increase your income is to negotiate a pay rise with your employer.

If you currently earn $100K and you negotiate a $10K pay rise, that’s $120 per week coming into your bank account (after tax).

Investment property managing top up

In a time where the labour market is tight, and it's hard to find good staff – if you are genuinely being paid less than market level … go for it.

Our team at Catalyst Financial recently sat down with a couple of investors. Both asked their employers for pay rises. Between the two of them, they increased their household income by $20,000 a year.

#6 Charge Board

This won’t be an option for all investors, but it’s worth mentioning.

If you have older children living in your home, or another family member staying with you, it might be an idea to charge them board.

For instance, $150 a week.

This could be the way to cover the cost of your extra contributions.

There are some investors who work with us who have done this, and it’s worked. A simple solution, but many might not have considered it.

#7 Go For A Yield Property

The last strategy on the list is for those who are looking for a new investment property today … and don’t have the ability to cover the top-up, or use the other strategies to manage it.

And that is to buy a yield property.

Managing property for top up

These are properties that don’t increase in value as quickly, but they earn higher rental income.

That means their top-ups are much lower.

A high-yielding property might only be negatively-geared by $50 a week, which might be more affordable for you.

So if you run the numbers and think you can’t afford the top-up of a growth property, one option is to go for yield.

Conclusion

It All Sounds Like A Lot ... Should I Just Wait Till Interest Rates Drop Again?

There are two main reasons why waiting for rates to drop might not be the right option.

  • You probably still need to increase your wealth for the long term

The thing with long term investment is – you have to think long term.

And if you don’t have a solid plan for your retirement yet, you probably still need to acquire more assets.

So if you need to increase your assets over the long term, seeing past the short term interest rate hikes can help you achieve your long term goals.

  • Right now, you can probably negotiate a good deal

Generally speaking in the housing market, you’re going to have something working for and against you.

Previously, interest rates were low and house prices were rising rapidly. To buy a property you’d have to pay top dollar.

New Build property nz

But, there was a good chance that if you bought house prices would rise and you’d make money.

It’s the opposite in today’s market. House prices won’t rise in the immediate future. But, you can use that to negotiate and buy a property undervalue.

For instance, let’s say you negotiate a $650,000 to $635,000 – this could make up for the initial cash flow shortfall.

The point we’re making here is: by the time interest rates start to level out…the opportunity for good deals may have passed.

While it can seem scary to put a property under contract today, by the time it starts to look less scary as the market recovers.

Who are Opes Partners?

Who are Opes Partners and can they help me?

What is the 3-Step Opes Coaching Programme?

1. Plan out your property investment portfolio

The first step in the programme is to co-create a plan using our MyWealth Plan software. We built this software specifically to help Kiwis create a financial plan in under an hour.

You'll leave this 1-hour session with a written down plan. Pen to paper.

2. Pick properties that fit with your plan

Once you've created your plan in step #1 – your property partner will go out and find properties that fit your plan. They'll search through projects from up to 58 developers to find the best ones for you.

When you meet again, you'll review the top picks, go through the analysis, crunch the numbers together, and then decide which ones to hold with the developer.

3. Dig into the details – Confirm it's the right property for you

Once you've selected a property, you'll work for 10 days to make sure it's the right property for you. So you'll work with your Property Partner and Client Relationship Manager to dig into the details of the property.

You'll go and look at the development and be introduced to mortgage brokers, solicitors, accountants, and property managers. Their sole job is to help you figure out if this property works for you.

And you’ll have access to all the resources, tools, and data … so when confirmation day comes, you have confidence you know you’re making the right decision.

Who is the Opes Coaching Progamme the right fit for?

  • You understand the concept of property investment, but who wants help putting it into practice.
  • You want a “Done for you” property investment service, so you can be a hands-off investor.
  • You are someone who has at least a 10 year investment time horizon.
  • And finally, you’re ready to become a property investor.

Who is the Opes Coaching Progamme is NOT the right fit for?

  • You’re more into the smell of paint or the colour of a wall than the numbers that stand behind an investment property.
  • You only want investments that are hands-on, so you can save a few dollars here and there.
  • You have plenty of time on your hands and want to do the property investment process yourselves.
  • You’re looking for an overnight success and want to get rich quickly.

What does it cost to work with Opes Partners and go through the programme?

It’s free. Complimentary. No Cost.

Why?

The developer pays us a marketing fee when you confirm that the property is the right fit for you. Very similar to the way a mortgage broker gets paid by the bank.

Now it's important to note that we are paid the same fixed rate no matter what property you invest in.

If it’s a $500k apartment in Christchurch or a $1.3 mil 3-bedroom townhouse in Ponsonby – we get paid the same rate.

That's important because then we can recommend the right property for you, and there's no incentive to recommend you invest in a more expensive property, just so we get paid more.

I want learn more about how Opes can help me

Learn more about the Opes Coaching Programme Here

LM b W

Laine Moger

Laine Moger has been a journalist and reporter for the last 6 years. She previously worked for Stuff, The North Shore Times and Radio NZ. She has a Bachelor of Communications (Honours) from Massey University and a Diploma of Journalism from the London School of Journalism.