Commercial real estate has three main costs
- Purchase price
- Operating expenses
- Loan Interest expense ( the price of money )
Maybe you could add loss of revenue from bad management or also consider additionally potential revenue from good management.
This purpose of this video will be to discuss the total cost of interest expense versus the purchase price cost.
Commercial mortgage loans rate are lower but have not gone down as fast as treasury instruments like notes or bonds. This is because
- The government and Federal Reserve have been buying Treasury instruments
- Lenders fear future increasing interest rates
- Investors have wanted a safe haven for their dollar denominated investments
5 year treasury notes are approx 1.5% and 10 years treasury yields are approx 2.5%
Down from much higher levels several years ago.
There is more not much more downside unless you expect interest rates to go to zero.
The risk is on the upside for interest rates.
So potential buyers have 3 main decisions
What type of property to buy and when to buy and where to buy?
Many people agree that the Texas economy is stronger than most areas of the U.S. and will remain strong.
Prices of have not substantially dropped and most have held their value.
Unless you include the sales of properties owned by out of state owners who have poorly managed their Texas real estate investments.
Several years ago out of state investors where rapidly buying income properties in Texas cities.
Now many out of state owners have decided it is hard to manage these properties by long distance phone calls.
Many of these properties have been foreclosed or have been sold, so the we have shaken out many of the weak out of state owners who bought several years ago.
Well managed properties have held their values very well.
So we have established that real estate is a good investment if it is well managed.
Back to the main subject of total interest rate expense.
Real estate buyers should know and understand the total interest rate expense.
Using 6% as a baseline variable on a $1mm commercial mortgage loan with a 30 year amortization, the total interest rate expense paid is $565,300 after ten years
If you wait for mortgage loan interest rates to increase 100 basis point or by 1% to the rate of 7% interest rate, then your total interest expenses for ten years would be $656,500, which is $100,000 more interest expense because you waited for interest rates to go up.
Almost 20% more interest expense.
The cost of your $1,300,000 closing statement purchase price just increased by $100,000 to an equivalent $1,400,000. Your total cost increased by approx 7.6%.
Prices of real estate transactions change everyday and the price of loans and the price of money changes every minute and every day.