Current and Potential Real Estate Investors Need to Read This

Executive Summary

A key to successful long-term investing is to ensure you’re getting compensated for the risk you’re taking on. Otherwise, the inherent risk will occasionally materialize and eat up your returns.

Investors must understand the long-term cash flows of a potential investment and compare those cash flows to the price of the asset to develop a long-term return model. This applies to stocks, real estate or any other asset class. I’ve done that analysis with stocks before, but today we’re talking about real estate.

Then the investor must determine if the projected return adequately compensates for the inherent risks as well as, in the case of real estate, the time and effort required.

With short-term treasury yields now between 4.4% to 5.4%, the hurdle rate for a real estate project is much higher than it’s been over the last fifteen years. After all, we can throw $1,000,000 into short-term government bonds and get over $50,000 per year in safe, effortless income. Continue reading “Current and Potential Real Estate Investors Need to Read This”

Rate Hikes Are On Pause

We received confirmation yesterday afternoon that the Federal Reserve is pausing rate hikes.

That’s the first FOMC meeting without a rate hike since early last year. In that time the Fed has raised its target Fed Funds Rate ten times from 0% up to it’s current target range of 5% – 5.25% in an effort to fight inflation and take the economy off emergency life support.


Continue reading “Rate Hikes Are On Pause”

What’s The Yield Curve and Why Does It Matter?

The yield curve has been a fairly reliable indicator of recessions. But, first, let me clarify what the yield curve is.

The yield curve is simply the annualized yields of various treasuries that mature at different points in time. You can then plot those yields on a chart to visualize the “curve.”

For example, plot the annualized yields for a 3-month treasury on a chart, the 6-month, the 9-month, the 1-year, 2-year, 3-year, 5-year and so on out until the 30-year maturity. Then you connect the dots and it creates a “curve,” much like the sample below. Continue reading “What’s The Yield Curve and Why Does It Matter?”

The Bad News is Interest Rates Increased. The Good News is Interest Rates Increased.

Bond prices go down when interest rates rise and vice versa. How is that? Well, think of it this way.

Imagine you bought a 10-year Treasury bond with $1,000,000 at the end of last year when the interest rate was 1.5%. That implies $15,000 of annual interest payments over the next ten years until maturity at which point you also get your $1,000,000 principal back.

However, the interest rate for 10-year treasuries has since risen to ~3.5%. So, who’s going to want the 1.5% bond when they can go buy essentially the same 10-year bond and get 3.5%? Nobody. Therefore, the price of the 1.5% bond must fall to attract buyers so that the yield-to-maturity is aligned with prevailing interest rates. Continue reading “The Bad News is Interest Rates Increased. The Good News is Interest Rates Increased.”

On Interest Rates: The Federal Reserve is in a Difficult Position

The most common discussion with clients recently has been about interest rates (and bonds) as interest rates have been rising swiftly as of late.

It’s a popular topic because interest rates impact our lives in various ways; rising interest rates causes bond prices to fall, rising interest rates means things purchased with borrowed money cost more (houses / mortgages, autos / auto loans, credit cards, etc…), future cash flows from investments / projects become less valuable, etc… 30-year mortgage rates have doubled to over 5% from 2.5%

On the other hand, rising rates also motivate us to save more as savings vehicles yield more and motivate us to take on less debt / pay down debt faster. When’s the last time we’ve earned any notable interest in our checking and savings accounts? Many young people probably don’t even realize that banks used to pay interest on those checking and savings balances. Continue reading “On Interest Rates: The Federal Reserve is in a Difficult Position”