Were We Wrong?? 😬

Hey there,

Two weeks ago in the aftermath of the new tariff announcements, the 10-Year Treasury rate dropped to sub 3.9%. We noted this and said “multifamily was the big winner should rates fall further and stay down”…

Clearly rates have not stayed down!

So were we wrong?

Sort of yes, and in the same breath, not entirely.

You see, with fixed-rate debt like the debt we use, we’ve hedged away a minimum of 7 years’ worth of downside liability (meaning risk) stemming from interest rate volatility.

i.e. we’re sitting in an asymmetric position.

If rates go down meaningfully, we push for a rate adjustment and benefit.

If rates increase, we’re unaffected at least for the remainder of our fixed rate period.

To put this into context, we can use an example of two nearly identical properties we own, purchased 3 years apart, and having an interest rate difference of roughly 300 basis points.

• Both have a similar debt load but nearly $5,000/mo difference.

• Both are stabilized and pay cash distributions quarterly.

Property A has been unaffected by the substantially higher prevailing interest rates today… as a result, the investor’s benefit is $4,500/mo from the rate hedge.

Should rates fall 300 basis points… we could refinance the old loan with a new one to where our payment is = $15,000/mo, meaning cash proceeds for investors (bigger loan, same loan payment).

Property B numbers made sense at purchase, even with the much higher debt expense. Cash flow positive day 1…

Should rates fall 300 basis points… we could refinance the old loan with a new one to where our payment is still = $15,000/mo, meaning cash proceeds for investors (bigger loan, same loan payment).

OR

We could do a rate adjustment to reduce the monthly payment, meaning higher quarterly distribution payments to investors.

Long story short, we are very aware of this equation and how the relationship works. We pay attention to interest rates and work them if we can. That said, we’re not in the interest rate trading business!

We hedge that risk and make sure we don’t need interest rates to come down for a deal to work. (FYI, there are a lot of folks who need lower rates to break even right now.. and not just real estate. Zombie companies who likely lived off cheap debt Big Lots, Joann, Red Lobster 👀)

So, when the 10-Year dropped to sub 3.9% we thought it might open an upside opportunity on deals we have (i.e. bonus bucks 💵)! So far though, we’re back to where it started 🙄

Figure out how to win!

Nate & Steven
Rust Belt Capital, LLC

www.rustbeltcapital.com

_Disclosure:
Rust Belt Capital, LLC is not a Registered Investment Advisor. Investing involves risk, including loss of principal. Past performance does not guarantee or indicate future results. Any historical returns, expected returns, or probability projections may not reflect actual future performance. While the data we use from third parties is believed to be reliable, we cannot ensure the accuracy or completeness of data provided by investors or other third parties. Rust Belt Capital, LLC does not provide tax advice and does not represent in any manner that any outcomes described herein will result in any particular tax consequence. This is not an offer to buy or sell any security. Offers to sell, or solicitations of offers to buy, any security can only be made through official offering documents that contain important information about investment objectives, risks, fees, and expenses. Prospective investors should consult with a tax, investment, or legal adviser before making any investment decision. Distributions or profitable investments cannot and are not guaranteed. Not intended to be tax advice and should not be solely relied upon to make an investment decision.