Skyrocketing Consumer Debt & Falling Rates
With home mortgages, the primary collateral for the loan balance is the home itself. In the event of a future default, the lender can file a foreclosure notice and take the property back several months later. With automobile loans, the car dealership or current lender servicing the loan can repossess the car.

Homeowners often refinance their non-deductible consumer debt that generally have shorter terms, much higher interest rates, and no tax benefits most often into newer cash-out refinance mortgage loans that reduce their monthly debt obligations. While this can be wise for many property owners, it may be a bit risky for other property owners if they leverage their homes too much.

With credit cards, lenders don’t have any real collateral to protect their financial interests, which is why the interest rates can easily be double-digits about 10%, 20%, or 30% in annual rates and fees, regardless of any national usury laws that were meant to protect borrowers from being charged “unnecessarily and unfairly high rates and fees” as usury laws were originally designed to do when first drafted.

Zero Hedge has reported that 50% of Americans don’t have access to even $400 cash for an emergency situation. Some tenants pay upwards of 50% to 60% of their income on rent. A past 2017 study by Northwestern Mutual noted the following details in regard to the lack of cash and high credit card balances for upwards of 50% of young and older Americans today:

* 50% of Baby Boomers have basically no retirement savings.

* 50% of Americans (excluding mortgage balances) have outstanding debt balances (credit cards, etc.) of more than $25,000. 

* The average American with debt has credit card balances of $37,000, and an annual income of just $30,000. 

* Over 45% of consumers spend up to 50% of their monthly income on debt repayments that are typically near minimum monthly payments.


Rising Global Debt 


According to a report released by IIF (Institute of International Finance) Global Debt Monitor, debt rose to a whopping $246 trillion in the 1st quarter of 2019. In just the first three months of 2019, global debt increased by a staggering $3 trillion dollar amount. The rate of global debt far outpaced the rate of economic growth in the same first quarter of 2019 as the total debt/GDP (Gross Domestic Product) ratio rose to 320%.

The same IIF Global Debt Monitor report for Q1 2019 noted that the debt by sector as a percentage of GDP as follows:

Households: 59.8%

* Non-financial corporates: 91.4%

* Government: 87.2%

* Financial corporates: 80.8%


Rate Cuts and Negative Yields

As of 2019, there’s reportedly an estimated $13.64 trillion dollars worldwide that generates negative yields or returns for the investors who hold government or corporate bonds. This same $13.64 trillion dollar number represents approximately 25% of all sovereign or corporate bond debt worldwide. 


On July 31, 2019, the Federal Reserve announced that they cut short-term rates 0.25% (a quarter point). Their new target range for its overnight lending rate is now somewhere within the 2% to 2.25% rate range. This is 25 basis points lower than their last Fed meeting decision reached on June 19th. This was the first rate cut since the start of the financial recession (or depression) in almost 11 years ago dating back to December 2008.

It’s fairly likely that the Fed will cut rates one or more times in future 2020 meeting dates. If so, short and long-term borrowing costs may move downward and become more affordable for consumers and homeowners. If this happens, then it may be a boost to the housing and financial markets for so long as the economy stabilizes in other sectors as well such as international trade, consumer spending and the retail sector, government deficit spending levels, and other economic factors or trends.

We shall see what happens in the near future in 2020 and beyond.

* The blog article above is a partial excerpt from my previous article entitled Interest Rate and Home Price Swings in the Realty 411 Magazine linked below (pages 87 - 91):
February 12, 2013

Why Apartments Are Such Popular Investments Today


In recent years, apartment buildings have become quite a popular investment option for real estate investors interested in finding good yields for their money. With mortgage underwriting guidelines tightening up considerably for residential properties (1 to 4 units), more real estate investors have decided to acquire apartment buildings.

As interest rates have fallen dramatically, many apartment and commercial mortgage rates have also dropped to incredibly low ranges somewhere within 3% to 5%+. The lower the rates and the mortgage payments, the higher the monthly cash flow.

Lower Vacancy Rates and Increased Tenant Demand


Ironically, the millions of homes foreclosed in recent years and the tightening up of government-backed or insured residential mortgage loans have forced previous homeowners into apartment units. As a result, apartment vacancy rates have fallen significantly in many regions.


The combination of lower vacancy rates and increased tenant demand has led to higher monthly rental income for apartment owners. The better the apartment owner’s Net Operating Income (NOI) figures, the higher the property valuation at a later date.


Smaller Apartment Buildings Are Easier


small apartment building

It's much easier to purchase and manage a small apartment building.

It is much easier to purchase and manage a small apartment building (10 to 20 units) as opposed to several different rental homes.


There will be less demand in various regions for smaller apartment buildings partly since there should be less competition from larger investment groups such as R.E.I.T.s, Pension Funds, Equity and Hedge Funds, and even wealthy foreign investors.


Annual yields of apartments will offer much higher rates of return than stocks, bonds, or commodities and are attracting more interest from small and large investors, domestic and foreign.

Smaller apartment buildings offer higher cash-on-cash returns to investors than many larger apartment buildings.  They are also much easier to manage by the owner or an onsite property manager. And a small apartment investor will typically earn more money per unit each month when compared to larger apartment buildings.


Since there are more small apartment buildings today for sale, there will be more motivated apartment building sellers who are willing to sell quicker at much lower prices. Accordingly, many sellers are more flexible with their pricing and potential seller financing options.


Since mortgage rates continue to hover near record lows, this will greatly improve the monthly cash flow options for property owners. In addition, the lower the interest rate on a mortgage, the faster the debt will amortize so that it pays off much quicker.


One of the better ways to reach early retirement is to own one, two, three, four, or five plus free and clear apartment buildings.


How to Determine the Apartment’s Value


How do investors and sellers best determine the apartment building’s property value today? First, they may begin with something known as the cap rate (capitalization rate). The cap rate is the ratio of a property’s yearly net operating income as compared to the property purchase price or cost to acquire the building.


The higher the cap rate, the higher the perceived risk due to factors such as location, building quality and design features, and other factors. The short explanation of NOI (Net Operating Income) is that one calculates their most recent year’s gross income and subtracts the annual expenses such as maintenance, utilities, management, property taxes, and insurance.


As rents have increased rapidly in many areas these past few years, then both gross rents and NOIs have increased, too. The increased NOI figures then have led to much higher apartment building values for many property owners today.


Lenders prefer that properties have NOIs that will be greater than the proposed total debt service so that the properties do not have potentially negative cash flow. Some lenders consider and allow a 1.0 (“Breakeven”) Debt Coverage Service Ratio. Other lenders want to see much more positive net annual income levels, so they prefer 1.25, 1.35, or higher DSCR numbers.


Ask These 5 Questions


When purchasing small to large apartment buildings today, an investor should consider first asking themselves these questions:

  • What type of mortgage loan can I qualify for today?
  • Which areas tend to have the most stable vacancy and employment rates?
  • What is my true net cash flow per individual unit?
  • Is this a better investment than residential?
  • Do I want to retire sooner rather than later?

With apartment rates hovering near the 3% to 5% range today, the much improved cash flows will work better than ever for investors looking to find exceptional apartment investment yields with less risk than many other investments today.


Do you want to work for your money, or do you want your money to work for you? Apartment buildings are some of the best ways to generate exceptional monthly cash flow for investors today, especially now that interest rates are near record lows.

*** The article above was written by Rick Tobin, and published in Creative Real Estate Online on February 11, 2013.


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