Taming Irrational Exuberance

On today’s show we are talking about leverage and the impact of rising interest rates on apartment owners.

Leverage in any transaction can be your friend and it can also bankrupt you.if you are over leveraged. Many investors have been betting on inflation continuing to rise uniformly across the economy.

When prices rise, then eventually wages will rise too in order to keep pace with inflation. Operating expenses will increase, but on average rent growth will outpace the rise in operating expenses.

But what about interest rates?

What if interest rates rise so fast that the result is negative cash flow?

Investors have bid up the prices of apartments over the past couple of years to levels that make no sense to me. We have read the reports of cap rates approaching 3.5% in many cities across the US including Austin, Denver, Nashville, to name just a few.

When interest rates are pushing 4.5-5%, then the bank is earning higher yield than you are as an investor. That is very reminiscent of the 2007-2008 timeframe. It’s as if investors failed to learn the lesson from the 2008 financial crisis.

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Host: Victor Menasce

email: [email protected]