Interest rates are a big deal for real estate investors … for many reasons.
The first and most obvious reason is because interest rates are the price of the money you borrow to invest with. Higher rates mean higher payments and less cash flow.
Of course, even when you pay cash for your properties, your tenants probably carry consumer debt … car loans, credit card, and installment debt …
Higher rates mean higher debt payments for your tenants, so less of their monthly budget is available to pay you rent or absorb rent increases.
Also, your property values, exit options, and liquidity are all affected by interest rates.
Higher rates mean buyers have less capacity to bid up comparable properties … and fewer buyers can afford to buy your property when you’re ready to sell.
For these reasons and others, most real estate investors and their mortgage advisors pay very close attention to interest rates … especially when financing or re-financing.
But there are other very important reasons for real estate investors to care about the future of interest rates …
Interest rates are a barometer for the health of both the currency and the overall economy.
Last time we looked, most real estate investors transact and denominate wealth in currency (dollars for Americans) … and your rental properties, tenants’ incomes, and overall prosperity all exist inside of the broader economy.
So the potential for big changes to either the currency or the overall economy matter to real estate investors just like they do to paper asset investors.
In fact, based on the amount of debt most real estate investors use, interest rates are arguably even MORE important to real estate investors.
We’re just a couple of days away from our Future of Money and Wealth conference … with nearly 400 people coming … and right now we’re thinking a lot about the dollar and interest rates.
Peter Schiff is speaking. Peter wrote Crash Proof in 2006 and released it in 2007. Back then, he loudly warned of an impending financial crisis whose roots would be in the mortgage market.
Sadly, back then we didn’t know Peter, and we didn’t read his book. Then 2008 happened, and we were blindsided by the financial crisis.
So now we read more … a LOT more.
We make time to listen to people like Peter Schiff, Robert Kiyosaki, and Chris Martenson. And we work hard to share them with our audiences.
A very interesting book we just finished is Exorbitant Privilege by Barry Eichengreen. He’s Professor of Political Science and Economics at Cal Berkeley.
Eichengreen published Exorbitant Privilege in 2011, which means he probably wrote it in 2010.
Keep this in mind as we share these prophetic excerpts from Chapter 7, “Dollar Crisis”…
“What if foreigners dump their holdings and abandon the currency [dollar]? What, if anything, could U.S. policymakers do about it?”
“It would be nice were this kind of scenario planning undertaken by the Federal Reserve and CIA … it would have to start with what precipitated the crash and caused foreigners to abandon the dollar.”
Note: Eichengreen probably didn’t know at the time that James Rickards, former attorney for Long Term Capital Management (the hedge fund at the center of the near financial meltdown of 1998), was participating in precisely this kind of planning, which Rickards describes in his book Currency Wars, published a year after Exorbitant Privilege.
Back to Eichengreen’s prophetic 2011 commentary …
“One trigger could be political conflict between the United States and China. The simmering dispute over trade and exchange rates could break into the open …
“… American politicians … could impose an across-the-board tariff on imports from [China].”
WOW … Eichengreen wrote that at least 7 years before this March 22, 2018 headline from CNBC:
Trump slaps China with tariffs on up to $60 billion in imports: ‘This is the first of many’
Back to Eichengreen in 2011 …
“Beijing would not take this lying down.”
China to US: We’ll match your tariffs in ‘scale’ and ‘intensity’
Eichengreen in 2011:
“Or the United States and China could come into conflict over policy toward rogue states like North Korea and Iran.”
If you’ve been following the North Korea drama, you probably know this one’s been back and forth.
But recently Kim Jong Un paid a secret visit to China. Of course, no one really knows what that was about.
But based on recent trade policy it seems the U.S. isn’t sucking up to China for help with North Korea. So maybe the U.S. and China disagree on North Korea?
Now STAY WITH US … because the point of all this is … according to Eichengreen …
China’s relationship with the United States and the U.S. dollar has a DIRECT impact on the future of YOUR money, interest rates, and wealth.
And if you’re like most Main Streeters, you may not completely understand the connection …
… just like we didn’t understand what Credit Default Swaps had to do with our real estate investing in 2008 … until everything suddenly imploded …
… despite reassurances from the wise and powerful man then behind the curtain of the Federal Reserve, Ben Bernanke.
And the point here isn’t Iran, or North Korea, or tariffs, or trade wars … it’s about whether China gets upset enough with the U.S. and opts for the nuclear option …
Eichengreen in 2011:
“… China [could] vent its anger and exert leverage … by … dumping [Treasuries] … would send the bond markets into a tizzy … interest rates in the United States would spike. The dollar would crater … could cause exporters, importers, and investors to abandon the dollar permanently.”
Obviously, there’s a LOT more to this topic than we can cover today.
Our point for now is that way back in 2010-11, Eichengreen envisioned a scenario in which conflict with China could create a dollar crisis.
As you can see, today’s headlines are living out his concerns.
When you read Eichengreen, like Jim Rickards, he talks about things reaching a tipping point … where everything happens fast.
We lived that in 2008 and it was NO FUN. But that was only because we were on the wrong end of it. While we got slammed, others made fortunes. They were informed and prepared. We weren’t.
So be cautious of normalcy bias and complacency when it comes to contemplating the possibility of a dollar crisis.
Better to be prepared and not have a crisis … than to have a crisis and not be prepared.
Until next time … good investing!
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