Subscribe by email
- Austin-San Antonio
- Clay & Co Investments
- Clay & Company
- Commercial Real Estate
- Dallas-Fort Worth
- Featured Listing
- Frequently Asked Questions
- Photo Friday
- Property Ownership or Management
- Real Estate Investing
- Real Estate Law
- Recent Transactions
- Triple-Net Investments
- Urban Planning
- Weekly Wrap Up
Monthly Archives: April 2012
By Carrie Rossenfeld for Real Estate Forum
It’s no secret that the net lease market is attracting many investors, new and veteran, seeking a safe sector for their portfolios. While there’s no sure thing in the investment realm, net lease does have its pluses, including long-term tenants assuring a steady income stream. But with so many players in the market looking for a great deal, how can savvy investors stay ahead of the pack and land the best net lease transactions? Real Estate Forum spoke with several industry experts to get their take on the net lease market and how to make smart choices when making acquisition decisions.
“Things are getting competitive,” says Jason Fox, managing director and co-head of domestic investments with W. P. Carey in New York City. “We have a low-interest rate environment and despite aggressive pricing, it’s inducing a lot of sales. A lot of users are considering sale-leasebacks, and private-equity firms are considering them for their portfolio companies as a way to access capital to finance growth and expansion.”
On the flip side, Fox adds, the market is also competitive for investors. Property yields have been driven down, and pricing that resembles 2007 is emerging. “There are good opportunities, though,” he says, “in a range of asset classes including retail and restaurants, despite the aggressive bidding out there. The good news compared to 2007 is that you’re still able to generate appropriate risk-adjusted rates of return for this type of investment, given the spreads between property yields and lending rates.”
Brandon Duff, director of the Chicago office for Stan Johnson Co., says staying educated about the market is key to remaining ahead of the competition: “Look for both good and bad. It’s also important to understand the debt markets and how they impact pricing.”
Knowing which market you want to be in is part of the education process, and it’s vital for net lease transactions. “You need to be an expert in the market you’re focused on,” says Nicholas Schorsch, chairman and CEO of American Realty Capital in New York City. “For example, if you’re looking for long-term income in net lease space, do you want to buy industrial, retail or office? There are different types of net leases like there are different types of restaurants.”
Schorsch, who also spoke at a recent RealShare Net Lease conference in New York City, believes that building a homogenous portfolio is key. “If all of the assets are in retail, it’s easier to sell it because you create more value,” he explains. “You want to be sector-specific, location-strategic and stay within your discipline. A lot of investors make a huge mistake by buying a variety of asset classes in a lot of different markets and end up with a mediocre portfolio that’s not well diversified. In net leases, it matters when you create aggregation value; you’re creating a mini portfolio.”
On the other hand, United Trust Fund aims to mitigate the risk of uncertain credit by diversifying the spectrum of companies with which it does business. “In the current economic climate, capital is expensive,” another RealShare speaker, Paul Domb,VP of asset management with Miami-based UTF, tells Forum. “This has resulted in a slew of sub-investment grade or dubious credits that do not have access to the capital markets and are now turning to sale-leasebacks. When you have a market where the credit quality has deteriorated, you must take a closer look at the real estate component. Both credit and real estate are the main considerations in a sale leaseback, and where one is lacking, you must look at the other.”
This strategy has worked for UTF: in its 40 years in business, the company has developed many long-term, repeat sale-leaseback clients. “It sounds simple,” comments Domb, “but in a dog-eat-dog market, the message is to keep your existing and prospective clients informed of your capabilities.”
For investors, having an optimal source of financing lined up that will enable them to maximize their yield gives them confidence to push pricing if they’re in a competitive situation, says Guy Ponticiello, Chicago-based managing director of Jones Lang LaSalle and leader of the firm’s corporate finance and net lease team. “Whether that’s five- or 10-year money— whatever the debt structure is that’s in line with the hold objective of the buyer—their ability to take advantage of some very cheap debt will keep them ahead of the pack,” he notes. “Some investors buy with the notion that they’re going to finance the acquisition at some level, but they may not have the structure figured out yet. The more investors can figure out available debt options and partner with a reliable debt source or intermediary mortgage broker, the better off they’ll be.”
Ponticiello is also founder of the new JLL Net Lease Exchange website, which is dedicated to the sale of triple-net leased single-tenant properties on behalf of occupiers, developers and investors. The site connects the sellers to JLL’s global buyer network through an exclusive inventory of properties of all types and sizes, combined with sophisticated transaction tools. JLL’s recognition of the net-lease market’s volatility is what drove the site’s creation.
In such a volatile environment, having a debt strategy is crucial, whether you’re a small “mom and pop” exchanging into net lease investment or a seasoned institutional investor, says Bill Rose, director of Marcus & Millichap’s national retail group in San Diego. “There’s no shortage of capital to finance net lease properties,” he says. “Five-year money can be obtained in the low-4% range. The question is how to reload that debt at that maturity. For other investors who are looking at fully amortizing zero-cash-flow bond financing, Triple-B or better-rated tenants afford free-and-clear ownership of the property upon maturity.” The private investor, while accounting for 80% of transactions of this size, is competing increasingly against institutional investors.
Financing is still the most difficult piece of the capital stack, particularly with more challenged credits or assets in secondary or tertiary markets, Ponticiello adds. “What someone thinks should be a fairly straight- forward transaction to get financed in this market can present a whole host of issues.”
In addition, for well-sought-after single-tenant transactions, many investors are differentiating themselves by putting up non-refundable earnest-money deposits or closing in very quick timeframes. “Given the still-fragile nature of the economy, certainty of closing is right up there with price as the most important criteria on which sellers base their decisions; that will help them bid better than others,” Ponticiello explains. “If I can get five-year money going into a deal, let’s say at 3.5% or 3.75%, and my hold strategy is five years, I can get a low-6% cap. But I can do that only if I feel confident that I can get that debt.”
Actual knowledge about the tenant and a broad view of the sector are key tools, and it’s helpful to have some debt in place. “The debt is clearly a factor on both large and small transactions, and it’s magnified on transactions that are larger than $10 million,” Ponticiello points out.
Some say that taking on more risk is one way to stay in front of the pack, but be sure it is managed risk and not simply outside the box for diversification’s sake. “The net lease market is really an opportunity to stabilize an income stream,” says Al Pontius, managing director of Encino, CA-based Marcus & Millichap’s national office and industrial properties group. “The way to enhance return is to move a little further out on the risk spectrum. I’m not talking about zero credit combined with a tertiary location— I’m talking about managed risk.”
Pontius explains that many active and professional investors buying large volumes of net lease assets on a regular basis believe that the lease term has to be 10 years or greater—even 15 years or more, for some— but this rule doesn’t necessarily apply. “If you want to beat the market and take what many investors would perceive to be a higher degree of risk,” he says, “look at non- major-metro locations, lower credit quality and shorter lease terms. When offered at an attractive cost basis, these investments can minimize the downside risk while allowing for higher going-in yields. And if the lease can be renewed, you can continue to have a great long-term investment, but you didn’t have the 15-year rate up front.”
There are many factors to be aware of with net lease transactions, including understanding that, in the end, these assets are still real estate. “It sounds remedial, but too many times net lease properties are described as bonds, or simply fixed-income assets,” says Duff. “While there’s truth to that, it is still important to understand real estate fundamentals and what to look for when acquiring commercial property.”
Also remember that the value of a real estate asset to an investor is its ability to produce cash flow. “You want to focus on maximizing cash flow on a risk-adjusted basis from individual assets and from your aggregate portfolio,” RealShare speaker Ben Butcher, president and CEO of STAG Industrial in Boston, tells Real Estate Forum. “You have to be cognizant of the things that affect cash flow for a particular asset going forward: a combination of underlying tenant credit and underlying real estate quality and value.”
He also cautions against being overly cautious regarding the risks associated with tenant credit. Viewing the world as black and white and drawing lines in the sand regarding what you’ll invest in can limit you unnecessarily. “The world is shades of gray,” says Butcher. “We substitute analysis for decision rules and look to understand these shades of gray that are the basis for our probability-based under- writing model. A primary market is not ‘good,’ and a secondary market is not ‘bad’—they’re just different.”
Pontius, like many other industry experts, also believes in diversification. “Investors may want to look at how much of the portfolio is comprised of one par- ticular credit, and they may not want to have more than 25% composition. Look for expiration terms that vary. Renewals are likely to happen in a very high percent- age of the assets, and that benefits a diversified portfolio.” The importance of conducting full diligence on every tenant cannot be overem- phasized. “Circuit City was a solid investment 10 years ago, and we saw that change,” says Rose. “You have to like the tenant and have good cash flow, but more importantly, you have to love the real estate. If the tenant goes dark, what am I going to do with the property? You need to go into the deal with eyes wide open and conduct your due diligence before you close.”
Schorsch suggests developing direct relationships with brokers and giving them the exact criteria of what you’re seeking so that they connect you with the right opportuni- ties. “You have to be careful about how broad a fishing net you put out.”
Also, be aware and wary of who is paying you rent for the entire lease term, Domb cautions. “Highly leveraged companies, a pattern of no net income, declining reve- nues, letters of credit tied to the income stream are usually red flags,” he relates. “Corporations today are asking for and obtaining shorter lease terms.”
In the past, investors have been bailed out with a low cap-rate environment such as the current one, given where borrowing costs and underlying treasuries are. “In today’s market, you need to rely on long-term holds and look at the fundamentals,” says Fox. “Are you at the right basis for the property? Is it a good, growing market with deep supply? Is the cost less than replacement cost?”
All of these factors, he points out, will protect investors in maintaining yield on the downside. It won’t do to rely on lower cap rates and asset appreciation anymore; these days, the bulk of the return is based on basic fundamentals and in-place income. ◆
HOUSTON — (April 24, 2012) —
Houston Office Market
Houston’s office market ended the first quarter with a total of 699,266 square feet of positive net absorption, according to quarterly market research compiled by Commercial Gateway, the commercial division of the Houston Association of REALTORS®.
Reversing last year’s trends, Class B space accounted for 86.3% of the first quarter‟s positive activity, recording its second consecutive quarter of positive activity. This year paints a different picture for Class B properties than in recent years; absorption in First Quarter 2011 was a negative 468,093 square feet for Class B and overall negative 264,293 citywide.
This quarter, Class A buildings citywide recorded negative absorption after seven consecutive positive quarters. Overall, seven of the 13 market areas, including the Central Business District (CBD), recorded more space coming on the market than being taken off, with several large former sublease spaces entering the direct market during the first quarter.
The three submarkets which recorded the largest gains in absorption were the Energy Corridor, North/The Woodlands/Conroe and the Northwest. One large lease committed in the Northwest but not yet counted as absorbed was Noble Energy‟s 497,447 square feet in a former HP building; the building is reported to be undergoing renovations with the company planning a move in Second Quarter 2013, which is when the space will be recorded as absorbed.
The current 12.6% vacancy rate is the lowest vacancy since Second Quarter 2009‟s 12.5% rate, and 1.3% lower than that same period last year. Selected buildings are seeing slight increases in rental rates, but the overall annual, weighted averaged, gross rental rate quoted for this quarter of $22.78 is slightly lower than last quarter‟s $22.90 rate and lower than the same period last year, which was $23.19. The CBD’s quoted rates also showed minimal decreases from the same period last year, reporting $31.46 today vs. $31.60 then.
Overall sublease space, at 2.2 million square feet, decreased almost 300,000 square feet from last quarter, and a total 21.5% decrease from the same quarter a year ago. Sublease space is either being leased at very competitive rates or returned as direct space as lease terms move closer to expiration dates.
Construction activity is looking up with nine buildings currently under construction, four in The Woodlands, two each in the both the Uptown and West submarkets, and one building in the North Belt West submarket. Scheduled for completion in 2012 are the two properties in the West and the one property in the North Belt West submarkets. Total under construction is 1.97 million square feet, following completions in 2011 of six buildings totaling 2.2 million square feet. The Woodlands is home to the largest number and size of buildings and includes the 549,260- square-foot Anadarko Tower II, the 234,589-square-foot Waterway 3, and two 32,000-square- foot buildings in the Black Forest Technology Park. Several other projects in the West, The Woodlands and Westchase have been announced for starts later this year.
Houston Industrial Market
Houston‟s industrial market continues to improve with positive absorption recorded and limited major construction on the horizon, according to statistics
released by Commercial Gateway. With a ninth consecutive quarter of positive absorption, the industrial market has seen a gradual decrease in its vacancy rate and a stabilization of rental rates. Vacancy overall is down to 7.2%, compared to 8.4% a year ago.
Net absorption in the first quarter totaled almost 1.3 million square feet, which is triple the amount noted in First Quarter 2011, but down from last quarter‟s almost 2.6 million square feet. Warehouse/distribution properties recorded about 1.1 million square feet this quarter, continuing a five-year trend of positive absorption and accounting for 85.5% of all absorption.
Properties classified as manufacturing are reporting the lowest vacancy rate of 4.6%, with crane-ready buildings still in short supply. Properties classified as warehouse/distribution represent about 72.5% of the total market. The two largest leases of the quarter were Gulf Winds International’s 247,240-square-foot lease at Port Crossing and Francesca’s Collection‟s 217,869-square-foot lease at Clay Point Distribution Park.
Rental rates have increased marginally during the last four quarters, with this quarter’s quoted, weighted averaged annual rental rate of $5.65 per square foot slightly higher than reported a year ago. Sublease space has not fluctuated much during the last two years, with 1.8 million reported in the first quarter, which represents a slight drop from fourth quarter but is about the same as this time last year.Construction activity is still brisk, with build-to-suits leading the way. Currently, 43 buildings in 33 projects totaling about 2.2 million square feet are under construction, with only the largest, the 475,000-square-foot, build-to-suit for Ben E. Keith Food Distribution Center, scheduled for completion in 2013. All others should be completed in 2012, with 13 properties slatedforcompletioninthesecondquarter. Thispastyearalsorecordedthecompletionof22 buildings totaling 1.6 million square feet, with nine of those representing 802,027 square feet built specifically for individual companies.
Tyler Rudick with Culturemap Houston recently reported on the new, locally produced documentary, The Art of Architecture: Houston.
Rudick explains, “To the uninitiated, Houston looks like a jumbled tangle of buildings placed haphazardly atop the coastal plain — which, of course, is a fair assessment for a city with little zoning. But this sprawling, boundless urban scene is, at the same time, what makes the Bayou City so unique with its patchwork of architectural gems and oddities.”
The Art of Architecture: Houston, airing on HoustonPBS, begins with a look at Downtown Houston followed by overviews of landmarks such as the Astrodome, the Menil Collection, Houston Ballet Center for Dance, and the Beer Can House. A later installment in the series will interview Yoshio Taniguchi on his new Asia Society Center.
“We wanted to provide a starting point for people who may not be as familiar with the city’s architecture,” said the film’s co-producer Kim Lykins.
“We really could’ve gone on for hours with this documentary,” said Jim Bailey, who co-produced the film along with Lykins. “There’s so just much to tell, so much to cover.”
See below or click here for a promo of the broadcast.
The flow of office investment sales in Austin is expected to increase this year due to an improving economy and a tightening supply of office space, according to the 2012 Annual Report published by Marcus & Millichap.
About 27,000 new jobs will be added in office this year, predominantly in the health care and education sectors.
Only 50,000 square feet of new office space will be delivered this year, according to the survey. Thus, vacancy rates are dropping to an average of 19.2 percent this year. Asking rents will rise about 2.1 percent to $26.14 per square foot with effective rents increasing about 3.1 percent to $21.40 per square foot.
Though cap rates remain lower than in other parts of the state, the favorable economic outlook should attract a significant amount of capital to local office properties.
Excerpted from the Austin Business Journal
Texas once again dominates Forbes’ list of America’s Fastest-Growing Cities, as the Lone Star State capitalized on low taxes and cheap real estate to draw in jobs from the rest of the country. To construct this list, we pulled data from Moody’s Analytics on the 100 largest metropolitan areas, giving extra weight to projected economic growth and subtracting points for low median incomes and high unemployment rates. The result is a list of cities that aren’t just growing, but creating opportunities.
1. Austin, Texas
Projected economic growth rate, 2011-2016: 6.1%
Population growth rate: 2.8%
Current MSA population: 1.8 million
Median income: $56,613
Projected economic growth rate, 2011-2016: 5%
Population growth: 2.2%
Current population: 6.23 million
Median income: $55,526
Projected economic growth rate, 2011-2016: 6.1%
Population growth: 2%
Current population: 6.23 million
Median income: $55,297
Projected economic growth rate, 2011-2016: 3.7%
Population growth: 2.1%
Current population: 2.25 million
Median income: $47,864
By Edward T. McMahon for The Urban Land Institute
Around the world, cities are seeking the recipe for economic success in a rapidly changing global marketplace. Indispensable assets in a post–industrial economy include: well–educated people, the ability to generate new ideas and to turn those ideas into commercial realities, connectivity to global markets, and multi-modal transportation infrastructure. Another critical—but often forgotten—asset is community distinctiveness.
If I have learned anything from my career in urban planning, it is this: a community’s appeal drives economic prosperity. I have also learned that, while change is inevitable, the destruction of a community’s unique character and identity is not. Progress does not demand degraded surroundings. Communities can grow without destroying the things that people love.
In 2010, the Knight Foundation teamed up with Gallup pollsters to survey 43,000 people in 26 cities (where Knight-Ridder had newspapers). The so-called Soul of the Community Survey was designed to answer questions such as: What makes residents love where they live? What attracts people to a place and keeps them there?
The study found that the most important factors that create emotional bonds between people and their community were not jobs and the economy, but rather “physical beauty, opportunities for socializing and a city’s openness to all people.” The Knight Foundation also found that communities with the highest levels of attachment also had the highest rates of gross domestic product growth and the strongest economies.
Place is more than just a location on a map. A sense of place is a unique collection of qualities and characteristics – visual, cultural, social, and environmental – that provide meaning to a location. Sense of place is what makes one city or town different from another, but sense of place is also what makes our physical surroundings worth caring about.
Author Wallace Stegner once said, “If you don’t know where you are, you don’t know who you are.” We all need points of reference and orientation. A community’s unique identity provides that orientation, while also adding economic and social value. To foster distinctiveness, cities must plan for built environments and settlement patterns that are both uplifting and memorable and that foster a sense of belonging and stewardship by residents.
Planners spend most of their time focusing on numbers – the number of units per acre, the number of cars per hour, the number of floors per building. In the future, they will need to spend more time thinking about the values, customs, characteristics and quirks that make a place worth caring about. Unfortunately, many communities are suffering the social and economic consequences of losing their distinctiveness.
When it comes to 21st century economic development, a key concept is community differentiation. If you can’t differentiate your community from any other, you have no competitive advantage.
Capital is footloose in a global economy. Natural resources, highway access, locations along a river or rail line have all become less important. Education, technology, connectivity, and distinctiveness have all become more important. Joseph Cortright, a leading economic development authority and president and chief economist of Impresa, a consulting firm specializing in regional economic analysis, says that “the unique characteristics of place may be the only truly defensible source of competitive advantage for communities.” Likewise, Richard Florida, author of The Rise of the Creative Class says, “How people think of a place is less tangible, but more important than just about anything else.”
Unfortunately, the subtle differences between places are disappearing. Today, if you were suddenly dropped along a road outside of most American cities or towns, you wouldn’t have the slightest idea where you were because it all looks the same, including the building materials, the architectural styles, the chain stores, and the outdoor advertising. Technology and the global economy make it easy for building plans drawn up at a corporate office in New Jersey to be applied over and over again in Portland, Phoenix, Philadelphia or a thousand other communities. Over the past 50 years many of the world’s cityscapes and townscapes have gone from the unique to the uniform, from the stylized to the standardized.
In recent months, there have been several surveys published, such as Zipcar’s “Future Metropolis Index” and Fast Company’s “Most Innovative Cities” list, ranking cities based on sustainability, innovation and efficiency. Some of the factors that were evaluated included the number of green buildings, the percentage of hybrid cars and the number of patents issued. These are all important, but sustainability is about more than new technologies. At its most basic, “sustainable” means enduring. A sustainable community is a place of enduring value. Doug Kelbaugh, the dean of the University of Michigan School of Architecture, put it this way, “If a building, a landscape or a city is not beautiful, it will not be loved; if it is not loved, it won’t be maintained and improved. In short, it won’t be sustained.”
Distinctiveness involves streetscapes, architecture, and historic preservation but as Cortright points out, it also involves cultural events and facilities, restaurants and food, parks and open space and many other factors. “Keep Austin Weird” is more than a slogan; it is a recipe for economic success. A distinctive city is a city that the young and well-educated want to live in, that boomers want to retire to, and most certainly a city that people want to visit.
According to The World Bank and the World Travel and Tourism Council, tourism is the largest industry in the world. Tourism is about visiting places that are different, unusual and unique. The more one city comes to look and feel just like every other city, the less reason there is to visit. On the other hand, the more a city does to enhance its uniqueness, whether that is cultural, natural or architectural, the more people will want to visit. It is no accident that Paris – a city that looks and feels different – gets 27 million visitors per year, more than any city on the planet, according to Lonely Planet.
Arthur Frommer, one of the world’s leading travel experts and founder of the well-known travel guide company, says that among cities and towns with no recreational appeal, those that preserve their past continue to enjoy tourism. Those that haven’t, receive almost no tourism at all. Frommer has been quoted as saying,“Tourists simply won’t go to a city that has lost its soul.”
In the future, planners will have to help communities adapt to change while maintaining or enhancing the things that they value most. Lyman Orton, the principal of the Orton Family Foundation, a philanthropic organization which supports community development, calls this “heart and soul planning.” It is both a process and a philosophy. The process seeks to engage as many people as possible in community decision making. The philosophy recognizes that special places, characteristics and customs have value. Given all this, I believe that one of the big questions for cities in the future will be: Do you want the character of your city to shape the new development, or do you want the new development to shape the character of the city?
Single-tenant net leased retail property capitalization rates experienced a 3 basis-point increase from 4Q11 to 1Q12, according to the Boulder Group’s 1Q12 Net Lease Market Report. Over the same time period, office and industrial net leased property cap rates compressed 15 and 6 basis points, respectively.
The retail cap rate increase is the result of lower quality assets entering the market. The report attributes the influx of lower quality assets — those with non-credit tenants and short-term leases as well as those in secondary markets — to opportunistic investors who are taking advantage of the increased demand and low cap rates in the net lease sector. Although transaction volume for single-tenant net lease properties remains high, investors expect it to cool off as interest rates rise.
Within the retail sector, not all cap rates rose in 1Q12. Cap rates for banks, CVS/Walgreens, and GSA-occupied properties compressed 15, 30, and 23 points respectively. According to the report, these properties “will remain attractive to investors because of the wide availability of credit tenant lease financing for these assets.”
Houston Press staffer Abrahán Garza likes to meld Houston’s past and present together.
He goes around town matching up old postcards to present-day sites, something he saw on the Web a year or so ago.
“I’ll find a remnant in the old photo I will try to match it up perfectly,” he says. “It’s definitely a plus when it’s an existing window or a doorway. I love when locations still have the original awnings, windowpanes or doors. I believe it’s sad when I find a location that is now a parking lot where once stood a beautiful, interesting building with detailed, thought-out architecture that no one would ever know about today.”
Some of the results so far:
By David John Marotta, Contributor
Question: I would like to see your take on paying off a house faster (extra principal payments) so that overall your house hasn’t cost you all the extra interest; or investing your money, taxable or non-taxable. I’ve heard arguments on both sides, some for rental property some for personal property. I own a duplex, live in one half, rent out the other half. So I’m a little torn between arguments.
I feel like society has been brainwashed to not make extra payments, or if you do, only do a little extra.(IE…bi-weekly payments bring in your payoff date.) Mainly because the argument is “you get tax deductions!”
Owners of rental property claim: get a 30-year, make sure you have cash flow, don’t make any extra payments. The tax deductions offset your income.
Debt free “gurus” say: Why would you pay $10K in interest only to get a $2.5K deduction? The faster you pay it off, the faster you’re not paying an extra $10K each year while getting a measly deduction.
I could go on and on with all kinds of arguments. Thanks for your time,
Answer: Great question! Financial advisors disagree because there are some things more important and some things less important. My advice is based on a millionaire mindset and not just a get-out-of-debt mindset.
In 2003 I wrote a column “Using a mortgage wisely” in which I listed seven rules for handling a mortgage. I started that column by saying, “Most Americans have a home mortgage. The rich often have two. Only the poor can’t take advantage of this ‘good’ debt.” Here are the seven rules:
- 1. Have a home mortgage
- Borrow a 30-year fixed rate mortgage
- Don’t buy down the interest rate by paying points
- Keep your mortgage debt under 30% of your net worth and under 80% of the value of your home
- Invest significantly in taxable investments each month
- Diversify your investments between stable fixed investments and growth stock investments
- After 8-11 years, pay off your mortgage or refinance depending on interest rates.
Having a mortgage at even as high as 6% means it is only costing you 4% and the government is paying the other 2% if you are in the 33% marginal tax bracket. Additionally, I don’t think you will ever see interest rates as low as they are right now. Just as the government will benefit from devaluing the buying power of the U.S. dollar because it will make it easier to pay off the national debt, so it will make it easier for you to pay off your mortgage with cheaper dollars over the next 30 years.
Bert Whitehead writes in “How to Get the Best Mortgage“, “A 30-year fixed rate mortgage is your best protection against inflation.” His article is worth reading and in it you will find much of the same advice.
Another way to look at a home mortgage which of the following is better:
- Having a home worth $360,000 which is appreciating with inflation
- Having a home worth $360,000 appreciating with inflation PLUS a $300,000 fixed 30-year mortgage on which you are paying 3% interest and the government is paying 1% interest by lowering your taxes AND $300,000 in taxable investments earning an average of 9-10% over the next 30-years.
Clearly (2) is advantageous. Any time you wanted you could slap your investments over your mortgage and be debt free. In fact, if your investments appreciate by 10% they should double in about 7 years. That means in 7 years you could pay off your mortgage and still have $300,000 in investments left over.
One more advantage, if you ever do need the money, if you have a mortgage you have a $300,000 cushion of an emergency fund. If you don’t have the mortgage and you get in financial trouble. NO ONE will loan you money once you are in financial trouble.
And this leads us to the reason for the mixed advice. If you are already living hand to mouth and unable to live within your means, you are not able to handle a mortgage well. If you can’t save money, then having $300,000 sitting around able to be spent will result in you spending it. Those with a millionaire mindset can have a mortgage. Those apt to spend and not save should work at being debt free and learning to save.