Cap rates in the old glory grounds of the Midwest on nice single family homes are now about 6 1/4% for a regular market deal – at non rip-off rents.  You might get a 10% cap…

fly by once in a quarter, but there will be zero to negative equity gain, and you’ll feel uncomfortable buying at the extreme top even though it’s a 10.  If we have a major crisis, is a Midwest 10% cap worth it vs building a pile of cash?

Any grand slam deals are swept up by the direct mailer & “wholesaler” guys, but I doubt they are getting anything judging by the slowdown in mailer receipts.    Most low hanging fruit have been picked, and for the strong landlords, it’s a bountiful harvest of cash flow being directed into T-Bills or new business startups to grind out.

The Midwest SFR (single family rental) landscape is barren of good opportunities unless you’re willing to take on a complete dump – and even those returns are stretches.  You’re working harder and making less.  But the guys that bought 100s of SFR homes during 2015-2023 with mountains of adjustable debt have hit grand slams to this point.  To those that cautiously bought with little debt and fear of bad times, their choice has proven wrong.  Rents, from when they were buying, have jumped 50% with the home prices themselves rising about 300%.  Small banks were wheeling and dealing.  So what if the rates go up?

But I hear some banks might be in trouble.  Christopher Whalen said a, “10 year at 5% yield – you’re talking about a negative capital position for the U.S. industry of about $3T.”

That’s a real number, but is $3T even enough to break the system?  Grandpa Warren said banks can absorb the losses, but he does have $350T in T-Bills now stacked for a rainy day, and the trickle of commercial property defaults keeps coming in.  But when will we see it reflected in market pain?

I don’t see the pain on the horizon yet.  Jobs are still plentiful, and new professional property managers have sprung up to ease the management burdens that the old “slum lords” took on themselves.  A posting on Zillow Rentals with a good margin for the PM still attracts a bounty of applicants eager to get their earnings extracted at these rates.  The home quality is in better condition now too.  The cheap (and “waterproof”) luxury vinyl plank installed throughout the entire home makes it easy to clean and re-rent.  Spray the kitchen cabinets, change out the bathroom vanity and surround on the cheap, and voila.  It’s clean and rentable.

So the only thing that would solve the affordability issue is a good old fashioned financial panic and liquidity crisis.  Perhaps Grandpa Warren sees this.  It’d be a tall order with the high equity and rents, but it’s always possible.  We’ve had a great run for 15 years, so perhaps it’s time for a little famine.

And unless one is starting other businesses and willing to grind it out, T-Bills still seem a decent choice, but the Fed is lowering rates to combat this.  I’ll still take a 4.5% T-Bill rate over a 6 1/4 Midwest SFR any day.  I don’t think the spread is worth it.  I’m not even sure about the one-off strange 10s.  In your finance books (to make things unnecessarily complicated, of course), think low Sharpe ratios and lower right on the efficient frontier.