The Real Estate Indicator Screaming “Buy”

I just locked down a 2.875% rate of interest, fixed for the 15-year term of the mortgage. No points. With rates like these, I find myself rethinking the idea that I want to pay off my mortgage.

I am able to do far better than 2.875% investing the money. If I just sock it away in gold, I bet I’ll come out way ahead. Finding investments that clear such a low hurdle isn’t that troublesome.

Now is a great time to try this, if looked at from a historic viewpoint. The 10-year Treasury rate is 1.64% as I write. That’s what real estate investors are willing to accept to lend cash to the US Treasury for a 10-year term. It looks completely funny. But the Treasury rate we see is kind of a forced grin.

The US Federal Reserve, as you know, pledges to keep rates low. So interest rates — Potentially the most vital prices in the entire constellation of prices — Are basically the victim of price fixing. This can have sickening implications down the road for the US economy, the stock market, the US greenback and more. Except for now, it is a license to print cash by borrowing cheaply and investing in rental property.

To see why, you’ve got to understand that Treasury rates are the platforms on which borrowing rates stand. I used to be a banker before I started writing newsletters. I recollect following the ?Treasury curve? (all of the Treasury rates for different terms) with great interest because we priced our loans off Treasury rates. So if I were in banking today, I would quote a rate of 250 basis points over the 10-year Treasury rate. That’d be 1.64% plus 2.50%, for a rate of 4.14%. The rate would change as the Treasury rate modified, or until locked in.

So that’s why Treasury rates are so important. Now let’s look at cap rates.

A cap rate is an investing term you should really know. It’s straightforward and intuitive to understand. It is the return you earn as an owner in the property. So if you purchase a property for a million bucks and it generates $100,000 in profits for you after costs, then the property has a 10% cap rate. (The $100,000 divided by your $1 million price.)

The cap rates available in real estate are attractive when viewed against the 10-year Treasury yield. A wider spread between the two means you can earn a wider profit markup. As you can see in the chart below, the post-2008 spread is the widest it’s been since the great 2002 bottom.

So this idea — as with almost all investment concepts — has a limited opportunity. When the low interest rate party begins to get into the small hours and the bartenders look prepared to make a last call, we’ll have to conscientiously step for the exit to beat the rush. That won’t occur till at least 2014.

Another caveat to my bullish real-estate call is that you have got to be a little picky. Not everything is inexpensive. Already, some of the finest properties in the most important cities are at full price. You get better price if you look at secondary towns.

As I’ve noted before, the chance in real-estate is especially attractive as there is still a lot of debt coming due. Including 2012, and through 2016, there is $1.7 trillion in commercial real-estate debt coming due. (In Europe, there’s just about a trillion greenbacks of debt maturing in just the following three years.) Borrowers must refinance that pile. They will probably have to put cash in the deal — or sell. The second creates great openings for investors in real estate.

My 2.875% mortgage reminded me of the benefits afforded those with good credit and their power to borrow at super-attractive rates. The same’s true in the corporate world. Now’s the best time to use these advantages in real estate investing since 2002.

[For more articles like this please visit our Property Investing Blog.]

Marco Santarelli is an investor, author and creator of Norada Real Estate Investments — a national property investment firm providing turnkey rental property in growth markets around the U.S..The Real Estate Indicator Hollering “Buy” was initially published on the Real Estate Investing Blog.

Tags: , , ,

Leave A Reply (No comments so far)

No comments yet