It’s a brand new year, which is a popular time for reflection, goal setting and resolutions, especially for your real estate portfolio.
It is difficult to watch the business news sources without someone mentioning words like, “looming recession,” “real estate bubble,” or “interest rate increases.” Without sounding like a doomsday theorist, it is always good practice to reflect and reassess your portfolio strategy often to plan for what you can. Does that mean it’s time to lock in your real estate investment assets to long term fixed rates? We think it just might be!
We are beginning to see further flattening in the yield curve evidenced by a tightening gap between the short term (3 months to 5 years) and long term (10+ years) U.S. Treasury rates. In English, what that mean is longer-term interest rates (10+ years) are becoming more and more attractive when compared to shorter-term (1-7 years) rates.
Historically speaking, when the spread between these indices inverts and becomes negative, economists often view this inversion as a tool to predict recessions. This inversion has actually been a predictor of the last seven U.S. recessions. Since our crystal ball is broken, we can’t explicitly say that's the direction we’re heading in at the moment. However, we are seeing the spread between 5- and 10-year USTs dipping below 100 basis points, making longer-term rates more competitively priced. It’s important to note this spread is not currently inverted and a recession doesn’t usually materialize for about a year after an inversion anyway.
We certainly are not professional economists, nor are we in the business of predicting recessions. So, while we are not currently at this inverted point, it may be a good time to reassess your portfolio strategy. Locking in longer term interest rates now could:
- Better insulate your investment assets from future interest rate risk
- Avoid balloon/expiration risk with longer fully amortizing terms
- Potentially lower debt service mortgage payments for a longer period of time
- Secure or increase cash flow and investment returns with longer amortization terms
- Reduce personal guarantees at lower loan-to-value levels
Does this mean we are heading toward an imminent recessionary doomsday scenario? Probably, but that’s not the point. If you arm yourself with the best real estate strategy you can build today, you will be better equipped to weather any storm. Happy New Year and happy investing!