In the last few months, mortgage rates have gone up like crazy. They went up a fourth time last week. Unprecedented. This is the biggest change in interest rates in years! And it only happened over 7 months!
In most of our properties, this has resulted in our debt payment DOUBLING. We care about interest rates, because when we put together a capital stack, a big chunk of the capital is the loan. The debt service on that is determined by the interest rate, which is very important to your bottom line and cash flow.
What’s unprecedented about these hikes is that it happened fast, happened multiple times, and the market hasn’t had time to adjust to it, resulting in minimal and even negative cashflows.
This is a sledge hammer that the federal reserve is taking to what they perceive to be “red hot, out of control inflation”.
No one has a crystal ball. It would have been impossible for anyone to predict this scenario. Despite multiple “what if” scenarios that we play out when we are underwriting a deal, we couldn’t have predicted all the factors affecting today’s economy such as: the credit markets, the federal reserve, inflation, energy costs going up, and supply chain disruptions.
The good news is that real estate is cyclical. We are currently in a down cycle.There are less sellers, less buyers, and the debt market is unstable because lenders are hesitant to lend!
So, is it time to sell and get out? Is it time to put our head in the sand and wait?
The cycle is neither bad nor good…it just is. For current real estate portfolios it requires pivots in strategy and requires the courage to keep going! No, you shouldn’t sit this one out.
The truth is that a recession brings HUGE opportunities for those who can overcome their fear and prepare to take action!
Cap rates are expanding and real estate is at a discount. Debt is expensive but real estate prices are coming down! I’m seeing prices go down by several millions!
As long as the deal makes sense financially, you can bake in the interest rates.
Remember, interest rates go up and they go down. They won’t stay up forever, they will come down.
We just need to make sure we are able to play a longer game and ride it out.
Exciting things are coming. Let’s get ready to go bargain shopping!