Perry I have to tell you that I have other business interests aside from my trading that are somewhat indirectly related to commercial real estate. That equity deal and deals like it are baffling to me. The cap rates that buyers are getting in commercial RE are so low, that I cannot for the life of me figure out why people are paying up like this.
There are assumptions that raising rents over time can move the cap rates up to 7% or so, but today at 5.5% why not have your money in risk free cd’s? Some of my friends who are commercial RE brokers tell me that it is a dreaded “new paradigm.” Whenever I hear that I start thinking the opposite.
My conversations with my mortgage broker about the property I am buying right now have been very enlightening. I only had to show one account balance from one of my trading accounts to borrow up to 1.5M! Even though the balances are substantial, alot more should be required than this. In the old days 7 or 8 years ago, a foot high stack of things were required. I was also of course scolded for having too much cash and no debt, what a terrible position to be in. I told her I could run out and get a quick Walmart credit card if I needed some revolving accounts!
She has been in the business for close to 30 years and she said she is commonly seeing people fudge people’s incomes by 5 or 6k per month to get approvals. Fortunately, she is wealthy, and cherry picks her loans because risking the type of crack back that could occur if you are caught is not worth another 10-15k more of income. She did make one comment which I think is telling of all of this, she commented on the dramatic change on behalf of the lenders that she has seen evolve over the years. It is not a new paradigm, it is almost now a different asset class than it was (housing). This is also the conclusion that I have come to, which is why I am of the mindset that there is going to be a floor under this ponzi scheme at a higher level than I had thought 6 months ago.
I do think that floor is at a lower level than where we are now without question. My property will lose value in the next few years, but I will just live in it, what a novel concept!
