The sudden increase of high-interest rates has been affecting real estate buyers’ purchasing power, while sellers haven’t adjusted their expectations on their property valuation. The apparent gap between sellers and buyers will take some time to adjust.
Today, we await the outcome of the Fed post-meeting press conference for their Nov 1st and 2nd meeting. You can see the FOMC Meetings calendar here. During the last Fed meeting, Chairman Jerome Powell said the Fed would do whatever it took to beat back inflation. The expectation consensus is another rate hike by 0.75 percentage points.
The effect of the sudden ongoing increase of interest rates is causing an erosion of capital, setting asset valuation pressure downwards with collateral assets risk of being called out.
We continue pursuing opportunities that make sense in strong markets, specifically in our home turf, Columbus, Ohio, but making any deal pencil out has been challenging. Onwards!
The cover image in this post presents a chart of monthly cash flow on a heavy-value add deal, with most units needing renovation. The opportunity does present good returns, 19% IRR and 2X gross levered EMX. But notice the negative cash flow for the 1st two years during interest-only payments; then, just before cash flow is about to turn positive, it goes back down when principal payments are required. The investment opportunity could be risky during the current recessionary environment. It will require additional capital to cover any unforeseen shortfalls.