And whether to hang on or sell. And the advice I've been mainly arguing against is the user that told him to lever up.
Yes, this debt is fine compared to 20 years ago. But not if your current note is cheaper. (And in my opinion, not at these valuations. We have 500-600 basis point higher debt than 2 years ago and valuations have gone up. You don't lock in until valuations are reasonable) That's the whole point. And definitely not if rates are about to come back down. That's the whole second point. And absolutely not if values are going to reset in any meaningful way and you don't have cash available to buy because you've already put in investments at higher valuations with higher debt. That's the whole third point.
The only way todays rates make sense is if you believe rates will never be lower and prices will only continue to go up. Or you have reached a terminal calendar event like the end of an ballon cycle. And that's fine if you believe that. I've just been saying that your assuming a lot of risk given the current backdrop of our economy, the bubbles in every arena, the credit squeeze, the historically low savings rate, the commercial real estate debt duration disaster looming, etc.
You're also only looking at the trees if you think the last 40 years are going to look like the next 40. Zooming out to the forest says that we're in a period of incredibly high risk only matched by the 70's under Carter. And the US was in far better shape back then and still endured far worse than what we have even begun to endure. Yes, I believe a correction is coming. The only way it doesn't is if the FED drops rates soon. I also see the skyrocketing cost of insurance and taxes. In my opinion, your money is best as cash in reserve waiting for the buying opportunity of a lifetime. You only get 2-3 of these. And if you're tied up in 80% leverage 6%-7% notes, you're going to miss it.
That said, if you get the chance to refinance at 3-4% in the near to mid future, and you can cash out while keeping a minimum of 40% equity in the deal, I wouldn't argue against that. It's the high leverage and putting new cash in more high leverage situations that makes me uneasy. It works in bull markets with the dollar devaluing. We're not in a bull market currently.
Lastly, commercial real estate is facing a wall. That wall is loan durations coming to end and there are minimal options available. Without rates back down 200-300 basis points, minimum, and very soon, there's going to be a ton of valuation changes. Because the bottom line makes zero sense at current rates. And a valuation reset in commercial real estate leads to a banking crisis. And that will affect everything, even your SFR rental.
At current rates, you have to be able to solve to a minimum of 6% unlevered. If you can't do that, and you don't have a pathway through renovation or mark to market to get there and ultimately higher, then you're making a bad investment. And very very few investments can solve to a 6 right now.
