As the economy starts to improve, now is the time to look at all of your debt financing, especially as it affects real estate. This might be the perfect time for you to consider purchasing that property that you have always wanted or to refinance some of your outstanding debt.
With the federal government spending as much as they are, there is no question in my mind that we will see a significant increase in interest rates as we are forced to finance the giant deficits that we are currently building.
Right now, rates are artificially low in order to encourage necessary economic growth. In time however, the Federal Reserve will raise interest rates to finance the national debt and curb the inflation caused by having too many dollars in circulation.
It seems like just yesterday when, in 1980 (I know, my age is showing), the prime rate neared 18 percent, making it almost impossible to afford any type of debt. In that case, the Federal Reserve was trying to slow the economy down to reduce inflation.
In preparation for this next period of high interest rates, try to eliminate all variable rate debt and convert it to current fixed rates with maturities that are as long as possible. While there might be closing costs or points to pay in order to make this happen, that amount is going to look like peanuts when rates quickly climb to 10 percent or above during the next two years.
Low cost debt combined with a depressed real estate market is the perfect situation for acquiring real estate, and opportunities like these do not come along very often. I really like the idea of buying real estate at less than the replacement value with cheap debt. After all, it is hard to lose very much money if you buy property for less than it costs to build an equivalent unit.
Now, with so many people experiencing cash-flow problems, banks have a large number of repossessions that they need to unload, both residential and commercial real estate properties. Lately, I have seen numerous commercial real estate transactions receiving financial assistance from the seller. It is a buyers’ market, and the deals are out there for those that have the necessary cash to cover both the down payment and the monthly payments.
Now go out and make sure that you do two things before the economy shifts and interest rates increase. First, refinance as much variable rate debt as you can into long-term fixed-rate debt. Second, if you can afford it, look to acquire real estate either for investment or for personal use.
Jerry Osteryoung is the Director of Outreach of the Jim Moran Institute for Global Entrepreneurship in the College of Business at Florida State University, the Jim Moran Professor of Entrepreneurship; and Professor of Finance. He can be reached by e-mail at firstname.lastname@example.org or by phone at (850) 644-3372.