What if interest rates continue to rise? (1 of 2)

 

Rising interest rates have been top of mind of late, so it’s worth addressing their impact on the land business.

 

A little background:

 

We do not borrow from banks for these land deals, so they are not in a position to increase rates on loans we do not have and do not plan to take out.

 

Instead, we borrow from the fund (that’s you) at a fixed 10%. That rate is already well above going mortgage rates of 5-6%, but it is acceptable to us because the terms are favorable and allow this business model to work.

 

Pros and cons of higher rates:

 

Pro: We sell ranchettes on owner financing, typically at rates exceeding 10%. Rising rates (chart) amongst other lenders have had the positive effect of making our rates much more palatable to prospective ranchette buyers, thus helping with sales.

 

Con: Higher rates are causing consumers to pay more for other purchases that they finance. This could squeeze the disposable income of some of our prospective buyers and therefore hurt sales a bit.

 

Con: It’s probable that rising rates are beginning to soften the real estate market, which includes rural land. We welcome this shift. A hot market attracted a lot of “buy and hold” land investors with deep pockets who have been competing with us as we attempt to buy. In a softer (or simply normalized) market, we can buy with greater ease and sell with what historically has also been relative ease.

 

The bottom line

 

Rising rates may be a net positive for our business, and we don’t see it impacting our investors.

 

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