The 10-year yield broke through what has been its upper resistance at 2.40% this past week. I pasted the chart below showing the blue line at approximately that mark. The economy performed better than expected with the GDP numbers; there is hope of tax reform; and several companies (e.g. Amazon) greatly exceeded expectations. All of this supports the FED increasing the discount rate as expected over the near term and then heading into next year. Things of course will change; however, right now upward interest rate pressures are leading the way.
Commentary: Be Wary of Over Leveraging
A few week ago, I received a call from someone wanting to buy an apartment complex with no money down. Although I applaud their desire to buy without having any money, it brought to mind that now may be the time to be a bit more cautious.
No one knows how long this upward surge in real estate values will continue. The old adage of “this time will be different” has always scared me in both real estate and stock market investing. Being the protector type, I would suggest not pushing leverage too far.
If you recall, back in 2009, many investors got way over exposed in their real estate holdings. Their leverage was so high that when the market fell, they were unable to cash flow their properties and eventually lost them. Those that had lower loan to value loans were able to weather the storm. They could reduce rents (or leases) enough to get through the downturn. This then allowed them to benefit from this market. Unfortunately, many bought high and had to sell low. And that has never been an effective strategy!
As we all counsel clients, just be aware that maximizing leverage has some risks associated with it. Those clients that heed that warning will, in the long-term, be quite grateful to those that guided them wisely.
That’s it for this week. As always, feel free to give me a call with any of your strategic financing needs.
Articles of Interest:
Bisnow reported “Why Your Brain Makes You Get Real Estate Investing Wrong.”
CNBC reported “Interest rates whipped higher in perfect storm of stronger US data and Fed speculation.”
NREI reported “Real Estate Investors Say Goodbye to Houston, Hello to Salt Lake.” My own guess is that Houston will produce some significant long-term returns. One just has to have the ability to wait for the turnaround.
USA Today reported “Walgreens to shutter 600 stores as part of Rite Aid deal.” Although the list of stores is not yet available, there should be some prime space coming to the market over the next 18 months. The question is how to best handle the existing lease issues.
MarketWatch reported “GDP grows at stronger-than-forecast 3% rate in third quarter.”
| Type | Rate | Fixed Term |
| Apartments | 3.885% – 4.680% | 3 to 10 year (30 yr amortization) |
| Commercial | 4.215% – 4.980% | 3 to 10 year (25 yr amortization) |
| Construction | Call for Rate | Call for Rate |