Here's a little story about how even after a long time in this business I still make amateurish mistakes, and how high interest rates can sometimes help you in real estate.

Back in 2021 I had the opportunity to buy 8 single family homes in my favorite investment market. These were right in my wheelhouse, high cash flow in working class neighborhoods, priced a what seemed at the time to be a low basis, and all currently leased. Problem was that this was the middle of covid, and I wasn't travelling. So I decided to entrust the inspections to my long-time Realtor, who has been wanting to have more decision making authority on my behalf. I bought the houses with cash, and after about 5 months decided to package them up with a few others and place a non-recourse blanket loan on all of them. The rate at the time was 4.96%, non-recourse, 10 year on a 30 year amortization. This loan also has a *yield maintenance* prepayment penalty, which guarantees the lender doesn't get hurt if I decide to pay off early. The penalty goes through year 9, so I have one year at the end to secure new financing. This is all par for the course in my world.

I closed the refi and after some months pass I start to realize how attrociously shitty these houses are. They're terrible. My realtor did a bad job and half assed the inspections, and I was being greedy rather than smart in trusting this guy for a package this big for his first attempt at more responsibility. Then I compounded that error by placing a long term loan on the properties with a massive penalty for early sale. So I'm stuck with them, and every dollar of capex I've been putting in over the last few years is money that I can't leverage. So my COCR on these risky, shitty, houses in terrible shape is ultra low. I'm pretty annoyed about the whole situation and how stupid I was.

So here's how high interest rates benefit me on this. The way yield maintenance work is essentially, you take today's risk free rate vs the NPV of future payments. If the future payments is higher than the risk free rate, you pay the difference. If it's not higher, you pay 1% of the loan amount flat. Here's the actual terms from the loan docs:

"(a) Any prepayment of principal shall be accompanied by (i) all interest accrued on the amount prepaid, plus, the amount of interest that would have accrued on the amount prepaid had the Loan remained outstanding through the end of the Interest Accrual Period in which such prepayment occurs, (ii) if such prepayment is made prior to the Par Prepayment Date, the applicable Yield Maintenance Premium (except with respect to any prepayment pursuant to Sections 3.2, 3.3 or 3.4), (iii) all reasonable costs and expenses of Lender incurred in connection with the prepayment (including reasonable attorneys’ fees) and (iv) all other amounts then due under the Loan Documents.

“Yield Maintenance Premium” means an amount determined by Lender to be equal to the greater of (a) one percent (1%) of the principal amount of the Loan prepaid and (b) the excess, if any, of (i) the sum of the present values of all then-scheduled payments of principal and interest on the principal amount of the Loan being prepaid through the Stated Maturity Date (including a balloon payment on the Stated Maturity Date of the remaining principal on the Stated Maturity Date),with each such payment discounted to its present value at the date of prepayment at the rate which, when compounded monthly, is equivalent to the Prepayment Rate when compounded semi-annually, and deducting from the sum of such present values any interest paid for the period from the date of prepayment to the next succeeding Payment Date in the event such payment is not made on a Payment Date, over (ii) the principal amount of the Loan being prepaid."

Ok so how does high interest rates help me? Because the current 7 year treasury is *higher* than the interest rate on my loan. Which means I pay 1% flat fee to get out of a bad situation that I created for myself.

Real estate is complex. Don't make my mistake -- diligence everything yourself or hire a true impartial person with no interest in the transaction closing to look at it for you. Second, understand your loan terms, what they mean, and how it works.

I assume you are not working with that agent anymore?

This is 90% on me and 10% on him. Yes he did a terrible job inspecting these houses. But in my finer moments I wouldn't have given him such a large deal to test his prowess on. I would have tried it with one small deal to see how it goes. I gave him a job that he was incapable of doing well, and then risked a lot on the outcome of that job. Pretty stupid, but not necessarily his stupidity. Which is to say, I do still work with him in a limited capacity but I don't have him making buying decisions on my behalf.

One additional note on this: The difference between the NPV of future payments at a 4.96 interest rate and the risk free rate at the time of loan closing (which was like 1% or so I think) would have been absolutely massive. The movement in interest rates saved my bacon here, which is super lucky.

Someone on the team has to micro manage real estate. Doesn't have to be you personally, but if you don't have someone on the team that is actually micro managing, you will get FCUKed.

Agent was micro managing his commissions.

Places where you get screwed if there isn't micro managing happening:

1) Leasing. Don't let in any bad apples into your properties.
2) Construction.
3) General building Repairs and maintenance.

I think it's true of almost any business or investment you're going to make. Not particular to real estate. People do what they're incentivized to do. A guy who has a stake in the transaction closing but no risk if the investment goes bad is just so obviously incentivized to see the transaction with rose colored glasses. And I know better than this but my judgement here was also flawed by 1) having way too much cash on hand at the time, 2) in an economic environment where I felt we were looking at hyperinflation around the corner, and 3) being stir crazy from being stuck at home for months in the first half of covid.

I don't really blame the Realtor for this situation, I blame myself. I know damn well that Realtors aren't for **** when it comes to investing. I'm glad that I can get out of this deal on the cheap, but it's a good lesson for myself and others. And what you said is right, the success of a real estate investment is directly correlated with how much you sweat the details throughout the investment.

Aside: anyone want to buy 8 low quality workforce housing units in the midwest?

I see big landlords that don't give a damn about the details. They just write a check and let someone else do it while they sit on their asses at home.


I go to a gym every day that is located in a large commercial complex. The landlords are doing a large food court renovation there and has been happening for a year.


Every day I walk by I always see a few of these construction guys slowly moving along, dragging their feet, walking with their heels kicking the floor, measuring, remeasuring. Ordering food at the food court, yacking to each other on the benches. Working like your typical silicon valley white collar worker, billing 8 hours of work while accomplishing 4-5. Money is just being lit on fire because there is nobody micro managing.


Happens to even the biggest guys out there.

Another comment I wanted to make on yield maintenance, if anyone is considering such a loan in today's environment:

Yield maintenance penalties get bigger when the delta is between the loan interest rate and the Tbill rate gets bigger. Conversely they get smaller (or disappear) when the delta gets smaller or inverts. So when I did this loan I borrowed at 4.96 when tbills paid 1%. When Tbills moved up to 4.5%, the penalty basically disappeared.

Now, if you borrow at today's rate of 7.5 and tbills go down to 3% or 2.5%, you have a massive penalty problem. You're locked into that loan for the duration because the prepayment penalties would all but destroy your equity in that scenario.

The logic from the lender's perspective is this: I loaned you money expecting a return of X% for at least 9 years. If you pay me back early, I'm stuck for the returns I was expecting. And, you know, I have investors and bosses that I have to report to as well and they want the returns I promised them. So I'll take the money you pay me back and put it into risk free tbills at the current rate, but you have to pay the difference (on an NPV basis) between what I was expecting from the loan and what I'm going to get from the tbills.

The risk to the borrower (for prepayment penalty at least) is that there's a large *downward* movement in tbill rates. The lower those suckers go, the more you have to pay to get out of the loan. In my case, the lender is actually making more money by me paying 1% penalty and putting the money into 4.5% tbills over the period.

Key takeaway is this: Don't agree to yield maintenance when Tbills are super high (like right now). Get a step down instead. There's less risk in a step down in today's environment.

Just hire an inspection company - they're incentivized to overanalyze the condition with risk of being sued if they're negligent. Easy solution.

Inspection companies are useless

Huh? You as a Buyer make money off a home inspection - they end up over analyzing every detail making problems out of nothing, but now you can go back to the Seller and ask for credits/repairs referencing their written report. They're also somewhat like an insurance policy - if something goes wrong with the house and they failed to note it you have a very clear case of negligence. Not sure what you're talking about.

They definitely tend to be fairly useless. Anyone with any decent property experience will catch everything an inspection would catch. Some of the infrared moisture detection stuff is about the only reason I would consider getting one. They hold 0 liability.

Like i said they’re useless. Inspectors don’t know very much. And tend to just make issues out of non issues and miss actually important stuff

well i saved a ton of money with my inspector.
i guess it depends in which country u live....

I rather pay a little more and have a structural engineer.

Gives you more leeway on a post inspection negotiation when it's written in a report from a company. How do inspectors hold 0 liability? If anything they hold all the liability. In my state offers are made subject to an inspection - having an inspector come out and make an issue out of nothing benefits me the Buyer as I now have leverage against the Seller for an additional credit.

I live in Canada for disclosure's sake but doubt there is significant real difference in most states.

I've underwrote and managed thousands of private mortgages against residential real estate. Been deep in that industry for 10 years. Never heard of an inspector being successfully held liable for any financial loss. We once tried to sue an appraiser who was probably off by 40%+ in their original valuation (deal predated me but I was around for the lawsuit). They got a minor slap on the wrist by their accreditation board and we spent low 6 figures on legal bills lol.

Edit: Agree they can be good for negotiation leverage though. Also useful for people without much knowledge who can use the report as a reference point. They are not totally useless but I think people put way too much confidence in the idea of an inspection report.

You have exactly 0% chance of winning a lawsuit against an inspector. In fact, I'm like 90% sure that the contract w/ the inspector states specifically that they take no liability. I agree with others that a general inspector isn't as valuable as a structural or pest inspection. Or just paying a roofer $100 to walk the roof or whatever. Generally speaking I have my GC inspect my acquisitions, which is what I should have done in the situation I mentioned earlier. I pay him $100 to do that, but he credits it back to me if he gets some work on the property after closing. I don't know that this will work for everyone though -- I just trust my GC a lot. Lots of history there.

In terms of negotiating leverage, yes that's true it can give you that under certain conditions. Depends on your market though. Also, scale matters. If I was buying a 100 unit apartment building, I'd get a general inspection, all mechanical systems, roofs, and Phase I environmental at minimum. For a single family home, wouldnt' do that much.

Spex, do you have any experience with mobile home parks?

I posted this in 2014 in reply to a similar question ... I am not sure if it is still in the 2+2 Archives.

You should look for the Ask me anything about Real Estate thread and
look up loonie deals.
There is a long discussion on mobile homes etc. and how to do these types of loans. You are much better off looking there.

You have a chance (probably very small) that someone who deals in this
type of deal will talk with you. The discussion is mostly from the other side
of the deal. The poster offers to sell the mobile home with a payment
schedule and if you fail to make one or two payments, the home goes back
into the sellers name. They spend a grand to re-spiff it up and sell it again
to the next (not credit worthy for a reason) buyer.

Thanks. I bought my first park a few years ago. It has been a cash cow but I have not been able to find another that fits the same risk profile.

Yes. It was a great business about 15-20 years ago, but the market has gotten quite efficient since then with so many REITs and syndicators in the mix. It used to be that you could buy park at 60% vacancy at a 10 cap on current NOI and turn it into a 20 cap by in-filling, then sell at a 9 cap. Now prices seem to be out of whack as lots of guys piled in with lower return thresholds. But I don't follow that market closely anymore.

So we have a rental property we bought with a 3% interest (although we only put 10% down so we are paying extra PMI until 2026) that is operating at a small loss as an AirBnB (with the usual tax breaks) that we are thinking of selling, because the AirBnB market seems to drying up and we think the real estate market itself might be going into a major downturn. FWIW the market is Joshua Tree, CA where prices doubled during Covid but have dropped down ~20% since, and we fear it could just keep going down.

Always, we dont really want to pay capital gain taxes (who does?), but aren't interested in actively reinvesting in real estate and avoid paying taxes by doing a traditional 1031 exchange. I was researching and it seems one possibility is a type of REIT that is structured to do 1031 exchanges, like the company in the link below.

https://www.kpi1031.com

--I was wondering if anyone in this thread has any experience or insight into this strategy to re-invest and kick the can down the road as far as paying taxes? And whether this could be a better strategy than just riding things out.

I have heard of people doing these. Also, look into Delaware Statutory Trusts

I think the 1031 exchange REITs are a subset of Delaware Statuary Trusts, although I could be wrong. I am really in the deep end over my head trying to figure out this stuff.