The FOMC held the federal funds rate at 3.5% to 3.75% today — the third consecutive meeting at this level. The statement cited solid economic activity, low job gains, and inflation that remains "somewhat elevated." Middle East uncertainty got a paragraph.
Three holds in a row isn't noise. It's a pattern. And it's time to stop running real estate plans on the assumption that rates are about to come down.
I see this all the time on calls with clients. A buyer has a property under contract or in late-stage diligence. The DSCR is tight. The numbers work if rates drop 75 basis points within a year. The phrase "we'll refinance" appears in the underwriting like an article of faith.
That's not underwriting. That's hoping.
Twenty years of doing this teaches you one thing about rate predictions: nobody can call them. Including the people whose job is to call them. The Fed itself has been wrong on its own forward guidance more often than not. Building a real estate business on the assumption that rates will move favorably is building on someone else's promise. That someone else isn't accountable to you.
The operator move is simple. Underwrite every active deal to current debt service. If it works at today's rates, do it. If it doesn't, walk away. Cap rate compression isn't coming to bail you out either — the spreads between cap rates and treasuries have already compressed in this cycle. The easy money has been made.
For existing positions, the same discipline. Run the DSCR with current rates. Check refinance options now even if you don't need to use them. Know what flexibility you have before you need it.
There are still good deals in this market. They look different from the deals that got celebrated in 2019. They have lower leverage, more equity, longer holds, and tighter operating margins. They reward operators, not speculators. That's not bad news. That's the environment. And it's a much better environment for buyers who actually know how to operate than the frenzy that came before it.
Questions worth bringing to your CPA and your lender:
- Where am I exposed to rate risk in my current portfolio, and what's my plan if rates stay flat through 2027?
- Are there refinance options I haven't priced out yet?
- Has my asset mix gotten too tight in any one piece of the debt stack?
The market is honest right now. Be honest back.
— John