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. We do, however, borrow from the fund at a fixed 10%. That is already well above going rates, but it is acceptable to us because the terms are favorable and allow this business model to work.
We sell ranchettes on owner financing, typically at rates exceeding 10%. Higher rates amongst other lenders has had the positive effect of making our rates much more palatable to prospective ranchette buyers.
It’s possible 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 wealthy investors 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.
For those concerned about rising rates, it’s important to keep in mind that the Federal Reserve is not incentivized to increase them to levels that would result in a significant negative impact.
The U.S. federal government carries substantial debt, and higher rates would result in it paying out much more via regular interest payments. According to this WSJ article, “if the average interest rate were to rise from 1.5% to 5% … the federal government’s interest bill would balloon from $400 billion to more than $1 trillion.”
Significantly higher rates would also be crippling for the countless Americans who carry consumer debt. That is not a pain that the U.S. government is eager to inflict upon its citizens.
Should rates rise to a level that leads you to believe your capital would be better invested in bonds or elsewhere, you are welcome to request a return of capital. It will be carried out according to the information in the “return of capital” FAQ.
Should bond rates rise above 10%, we would consider a temporary increase in the fund’s loan rates and preferred returns to match those of bonds.