We live in a time of great uncertainty, and smart people are wondering where they should put their money to weather any coming storms. More on that later.
First, interest rates are important for understanding the investment environment, so I included a chart of long term US Treasury bond interest rates. These bonds reflect interest payments 20 years into the future, so they’re a nice way to estimate near-to-medium term interest rate trends.
As you can see, unless you take a short-term view, there is no clear upward trend in interest rates. Several times, Federal Reserve Chairwoman Janet Yellen has signalled intent to raise interest rates. We’ve seen instances where rates rose for a few months, and then fell back down to historically low levels. This makes sense because, if interest rates rise too quickly, borrowing gets expensive, investment slows, and the economy can stumble. That’s one reason why the Fed has erred on the side of keeping rates low.
The Federal Reserve is designed to have autonomy from the elected government, specifically to avoid tainting important economic decisions with political agendas. The recent elections haven’t changed anything, because the Chairwoman still sets Federal Reserve policy, regardless of what party is in power. We know rates have to go up eventually, but we don’t know when.
In the meantime, I want to lock in these low rates while I can, so I’m doing more deals than ever. As long as interest rates stay down, I plan to keep accumulating more investments. There will be plenty of time to sit back and reap the rewards later. I’m also looking for fixed-rate financing that doesn’t assume cheap debt will last forever. It won’t, and I’ll be ready.
Whenever interest rates do start to rise, I’ll feel great about the real estate investments I’m making today. Rising rates mean new competing real estate developments will get more expensive, and that will help me get more cash out of properties I already own. Higher interest rates also encourage foreigners to move their money to the United States, where they will benefit from our economic stability as well as higher rates of return on their savings. When money flows into the economy, it has to go somewhere. That means sitting in the bank, or more likely, bidding up stock, bond, and real estate prices. Higher asset prices down the road offer a great opportunity to cash out and enjoy the fruits of wise investments made today.
There is a darker scenario where the Fed waits too long to raise interest rates, or too much foreign money floods into the US, and we experience inflation. Normally, inflation is something we expect to see in poor countries with crappy economies. Thankfully, this hasn’t been a problem in the United States since the 1970s since inflation really sucks for the average citizen. But there’s a silver lining for the prepared real estate investor. By reducing the real value of a dollar, inflation basically erases debt, which makes debt-financed investments, like real estate, perfectly positioned to profit from hard times. During inflationary periods, real estate investors can raise the rent on tenants, but the bank cannot increase our debt principal. It’s a huge win.
When I think about the current interest rate environment, I start to salivate. And the more uneasy other people are about our future, the hungrier I get. The great investor Warren Buffet famously said that we should be “fearful when others are greedy, and greedy when others are fearful.” Anxiety in the air and very low interest rates are giving me the signal to get while the gettin is good. Real estate might not “pop” like hot stocks, but it’s a prudent place to put your money. Right now, I’m doubling down.
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