Although the 10-year yield did not increase much this past week, we have now broken through the upward resistance at 2.3%. In the graph below, 2.3% becomes the support line; and 2.42% is now the upward resistance line. I can theorize that this is due to the perception that Washington DC seems to be moving toward getting some things done. However, it is easily arguable that they will continue to struggle to make any meaningful progress. For now, rates are slowly moving up.
Sometimes I like to step back and take a higher level look at what I see in the investment real estate markets.
- Retail certainly has a higher level of risk due to fundamental changes due to the Amazon and Walmart type effects.
- Residential Investment properties are exposed to rent control issues
- Potential tax code changes could affect mortgage interest write-offs
- Bay Area Cap Rates have been compressed (implies high prices) and are affecting the surrounding secondary and tertiary markets.
- Interest rates are slowly moving up.
From a strategic perspective (and as a protector), I would suggest owners and potential buyers look at keeping their leverage under the maximum allowed (if possible). This will allow some flexibility when loans come due in the future. If we experience pressure on Net Operating Income (NOI) when loans come due later, then having lower leverage now will provide more insurance towards refinancing down the road.
Remember, lenders look at several factors when deciding how much of a loan to offer on a property. The primary drivers deal with NOI and interest rates. Investment property owners that keep their loans nearer to 50% loan to value will have more flexibility to handle the impact of reductions in NOI and increases in interest rates. This will protect them from having to sell should the new loan amounts fail to cover the existing debt.
We have experienced a great run-up in real estate valuations. Real estate is a great long-term way to create wealth. However, there are those that can get too aggressive. This has occurred before when many lost their properties (typically in the central valley). Often, diversification is discussed primarily in the stock markets. It can also be used in real estate investing. I suggest you reach out to your investment clients and see if they are positioned properly to handle the changes occurring now.
As always, I welcome any of your comments. Please feel free to contact me with your strategic financing questions and needs. Have a good week.
Articles of Interest:
CNBC reported “How self-driving cars will profoundly change real estate.” Some food for thought.