1 year ago, everyone was complaining about high real estate prices despite very the attractive financing available. Today, everyone is complaining about the financing landscape just as prices are starting to become more attractive. This reminds us of individuals who constantly mention how they can’t wait for summer months in the winter only to complain about hot days and sticky weather come mid-June. In our minds, this market apathy begs the question: which is more important–purchase price (aka ‘basis’) or financing?
As a fellow investor friend (not Socrates hehe) once said to me, “financing is temporary, but basis is forever.” The statement holds true because the basis at which you buy your real estate will never change throughout the life of your hold. However, debt markets change often. As a result, an investor may be presented with the opportunity to refinance at more favorable terms multiple times throughout their ownership of a given asset. With rates having backed up 400 bps (4.00%) since late 2021 for some loan products, this “financing optionality” is perhaps more important today than at any time in recent memory. In fact, we would hypothesize that the next 12-18 months of uncertainty represents a very compelling opportunity: to buy assets at a potentially discounted basis and match them with debt that provides flexibility. This flexibility gives the investor the potential to refi into lower-rate perm debt when the time comes and rates decline.
To illustrate this concept further, ask folks who bought in early 2020 if they regret it. They bought during arguably the most uncertain period in recent memory and, if they managed well and financed their acquisitions flexibly, today they’re looking like rock stars. As always, uncertainty creates opportunity for the discerning, long-term investor. Don’t wish times were more certain, simply have the courage and resourcefulness to be a better investor.
