EP291: High Mortgages, Low Rates: How Investors Are Cashing In

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Why Are Mortgage Rates Still So High in 2024?

In 2024, the Fed didn’t just cut interest rates once—it slashed them three times. Three!

You’d think mortgage rates would take a nosedive, right?

Wrong.

They’re stubbornly high, leaving many scratching their heads.

So, what does this mean for you as an investor?

Do you sit on the sidelines, or do you figure out how to make the market work for you?

Stick with me because by the end of this, you’ll know exactly how to navigate these waters—and maybe even come out ahead.

Why We’re So Passionate About This

For six years, we’ve been buying multifamily apartments—over $300 million worth. 🏢

We’ve seen it all: wild interest rate swings, unique loan structures, and every market condition you can imagine.

Along the way, we’ve learned this simple truth:

The rise and fall of interest rates can make or break a deal.

But here’s the exciting part: if you know what you’re doing, you can win big, even when the rates aren’t playing nice.

The Origin of Today’s Interest Rate Shock

To understand where we are now, let’s rewind to 2020.

The pandemic hit, and the Federal Reserve slashed interest rates to near-zero to keep the economy afloat.

What followed was a real estate boom fueled by cheap financing.

But then came the twist no one saw coming.

In 2022, inflation skyrocketed, and the Fed switched gears with aggressive rate hikes—the fastest we’ve seen in decades.

This abrupt shift shook the market and brought bridge loans into the spotlight.

What’s a Bridge Loan, Anyway?

Traditionally, multifamily financing leaned heavily on Fannie Mae and Freddie Mac for long-term, stable loans.

But after 2020, their lending activity dropped by nearly 33%, leaving a financing gap that bridge loans filled.

Here’s the catch with bridge loans:

• Short Terms (1-3 years)
• Floating Rates (manageable at first, but a nightmare as rates soared)
• Higher Leverage (fine in a stable market, risky in a volatile one)

At the time, they seemed like a no-brainer. But as rates climbed, these loans became a ticking time bomb for many investors.

Why Are Mortgage Rates Still High Even After Fed Cuts?

Let’s talk about the elephant in the room.

Contrary to popular belief, mortgage rates aren’t directly tied to the Federal Funds Rate.

Instead, they’re influenced by two key players:

1. Mortgage-Backed Securities (MBS)
2. U.S. Treasury Bonds

Think of MBS like a box of chocolates: when demand is high, prices rise, and yields (aka mortgage rates) drop. But when demand falters, prices fall, and yields rise—keeping mortgage rates high.

Economic uncertainty, inflation fears, and risk aversion have all contributed to keeping MBS yields elevated, despite the Fed’s rate cuts.

Is It Time to Sit Out or Dive In?

Here’s the exciting part: this is actually a golden opportunity.

The market is ripe for savvy investors who know how to spot a deal.

➡️ According to CRE Daily, over $84.3 billion in loans will mature in 2025, with another $90 billion in 2026.

Some properties will thrive.

Others will struggle, weighed down by weak fundamentals or debt issues. And for those ready to act, distressed properties could be the deal of a lifetime.

The Smart Investor’s Playbook

Here’s how we’re navigating this market:

1. Focus on A-Class Assets
   • We target properties with strong rent-to-income ratios, typically 6x or higher.
   • For example, one of our properties has tenants with a median income of $180,000 and rent at $2,000—a healthy 7.5x ratio.
2. Seek Underperforming Gems
   • We’re not looking for bad properties. We’re looking for good properties with bad management or structural debt issues. These are assets we can turn around with operational improvements or strategic financing.
3. Capitalize on Discounts
   • Properties bought at inflated prices with weak fundamentals are hitting the market at 30-50% discounts. Once rates stabilize, these assets will be primed for value appreciation.

Why the Market Is Heating Up

Capital is flowing back into commercial real estate.

In 2024, loan volumes are expected to rise 26% to $539 billion, according to the Mortgage Bankers Association.

Debt funds are stepping up, filling gaps left by traditional lenders.

With shorter-term debt solutions and attractive yields, this is shaping up to be one of the best entry points for commercial real estate in 15 years.

Will You Seize the Moment?

The big players are already positioning themselves for the next wave of opportunities. They see what’s happening: a chance to acquire high-quality assets at significant discounts and ride the wave of recovery.

The question is, will you join them?

If you’re ready to learn how to capitalize on this market, we’ve got more insights waiting for you in this next episode. See you there! 🚀