Welcome to the second edition of The BlackArc Quarterly. Keeping up with the latest news and trends in real estate investing can help you make informed decisions and achieve your financial goals. In this edition, we’re covering the recent Fed update, cap rates, understanding your K-1s, and a BlackArc Asset update. Let’s get started.
Federal Reserve Update
On March 22nd, the Fed raised the Federal Funds rate another quarter point, bringing the short-term rate to a range of 4.75% to 5%. Despite the collapse of two banks and the near-collapse of a third, the Fed was persuaded to hike rates again due to stubbornly high inflation and a strong job market with strong wage growth.
Powell expects the need for one more rate hike this year, with seven of the 18 Fed officials forecasting two hikes. The end range would be 5% to 5.25% if the short-term rate is raised another quarter point.
Additionally, small and mid-sized banks hold 67% of commercial real estate loans and 37% of residential real estate loans. Higher rates will likely push commercial real estate values lower, resulting in a major value adjustment for commercial properties, especially if there is a recession.
What does this mean for real estate?
The Fed’s decision to raise interest rates will likely push commercial real estate values lower. Higher rates will make it more expensive for investors to borrow money for property purchases. Owners looking to sell their properties may have to offer deals at higher cap rates to attract buyers, and banks may cut back on lending to preserve capital.
As much as $270 billion in commercial mortgages are set to mature this year, which could lead to a “major value adjustment” for commercial properties, especially if the economy sinks into a recession. Overall, the rate hike and ongoing banking turmoil could significantly affect the commercial real estate market.
Investing Acronyms Unwrapped: Cap Rates
Capitalization rate, or cap rate for short, is a financial metric used in real estate investing in measuring the annual rate of return on a property based on the profit that the property is expected to generate. In simple terms, it is the ratio between the net operating income (NOI) and the property’s purchase price.
Let’s say you purchase a property for $150,000, and the expected NOI in the first year is $12,000. To calculate the Cap Rate, you would divide the NOI by the purchase price:
$12,000 / $150,000 = 0.08
The Cap Rate for this property is 8%.
Why it matters:
Cap Rate is an essential piece of the puzzle to consider when evaluating an investment property. It provides investors with a clear understanding of the potential profitability of a property by showing how much income the property is generating relative to its market value.
A higher Cap Rate indicates a better possible return on investment. Still, it’s important to note that other factors such as location, market trends, and potential for future growth should also be considered when evaluating a property.
Tax Tip: Understanding K-1s
A K-1 is a tax document that reports the income, gains, losses, deductions, and credits of partnerships, limited liability companies (LLCs), and S corporations. It is similar to a W-2 or 1099 form but is used for pass-through entities where the business income is passed through to the owners’ personal tax returns. The K-1 form is issued to each partner or shareholder and includes information needed to complete their individual tax returns.
Here’s a quick video walking you through the first page of your K-1.
BlackArc Asset Update
1215 24th Street: Two new tenants moved in this quarter. We updated the carpet. We also had a large tenant move out upstairs and are now breaking the space into three smaller spaces to lease. We will build a few walls, update more carpet, paint, and trim. We plan on updating the bathrooms in the next 3-6 months.
1629 Ave. D: We are in the process of changing the lights to LED.
3010 Stower: We need to install a new AC roof unit to replace a very old unit that stopped working.
If you have any questions or would like to learn more about real estate investing with the BlackArc, don’t hesitate to Contact Us. Our team is always here to help you navigate the world of real estate investing, make the most of your investments, and care for your properties like our own.