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 assumption that I want to pay off my mortgage.
I am able to do far better than 2.875% investing the cash. 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 difficult.
Now is a great time to do that, if looked at from a historical perspective. The 10-year Treasury rate is 1.64% as I write. That’s what real estate investors are ready to accept to loan cash to the US Treasury for a 10-year term. It looks completely crazy. But the Treasury rate we see is a forced smile.
The US Federal Reserve, as you know, promises to keep rates low. So interest rates — Possibly the most significant costs in the entire constellation of prices — Are essentially the victim of price fixing. This may have sickening results 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 making an investment in rental property.
To grasp why, you have to understand that Treasury rates are the platforms on which borrowing rates stand. I was a banker before I started writing newsletters. I recollect following the ?Treasury curve? (all 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’d quote a rate of 250 basis points over the 10-year Treasury rate. That will 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 know. It’s simple and intuitive to realize. It is basically the return you earn as an owner in the property. So if you buy a property for a million greenbacks and it generates $100,000 in profits for you after expenses, then the property has a 10% cap rate. (The $100,000 divided by your $1 million purchase price.)
The cap rates available in real-estate are tasty when viewed against the 10-year Treasury yield. A broader spread between the 2 means you can earn a wider margin. As is clear 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 ideas — has a limited opportunity. When the low interest rate party starts to get into the early hours and the bartenders look ready to make a last call, we’ll have to diligently step for the exit to beat the rush. That won’t occur till at least 2014.
Another proviso to my bullish real estate call is that you have to be a little choosy. Not everything is inexpensive. Already, some of the best properties in the largest towns are at full price. You get better value if you look at secondary cities.
As I’ve noted before, the opportunity in property is particularly engaging because there is still a lot of debt coming due. Including 2012, and through 2016, there’s $1.7 trillion in commercial real estate debt coming due. (In Europe, there’s nearly a trillion dollars of debt maturing in just the following 3 years.) Borrowers will have to refinance that pile. They will probably have to put cash in the deal — or sell. The second creates great opportunities for real estate investors.
My 2.875% mortgage reminded me of the benefits afforded those with excellent credit and their power to borrow at super-attractive rates. The same applies in the business world. Now could be the best time to use these advantages in real-estate investing since 2002.
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Marco Santarelli is an investor, writer and creator of Norada Real Estate Investments — a national property investment firm providing turnkey rental property in growth markets around the United States.The Real Estate Indicator Screaming “Buy” was initially printed on the Real Estate Investing Blog.