Stop Buying Overpriced Real Estate!
October 24, 2026
I'm back from my 8 week break. This is an unusually long newsletter for me. I hope you find it useful.
What’s happening in real estate over the next 18 to 24 months has been coming for a long time. Here’s a quick run down of what some of you probably already know. But most people would not know this if you rely on main stream news to get your real estate information.
It Repeats
Every 10 to 20 years we run through a real estate cycle that creates booms and busts of varying sizes that seem to get worse every time. Every time a bust or collapse happens most people act like they’re completely surprised by it even though there are those that have been warning about it coming for the last couple of years. Then there are those that insist “It’s different this time. It won’t be like the last time.” They are correct about that. It’s always worse than the last one. This is my fourth crash, the third one centered around real estate(yes we are headed that way). It’s always worse than the previous time. So what what does this have to do with buying overpriced real estate?
We are hopefully all aware of the Federal Reserve manipulation of interest rates in what they claim is an effort to keep the economy stable. First they lowered the rates to a ridiculous level and of course real estate started booming. Prices went up. People bought even though the property was overpriced because the interest rate was so low they didn’t care. Their payments were low. Then they doubled the interest rates so now no one wants to buy. That’s the surface level of what’s happening.
A Whole Different Animal
Dig a little deeper and you will come across commercial real estate. It’s a very different world that most people don’t know about. They are exposed to it every day when they go shopping, when they’re at work, when they go out for dinner, or even where they live if they happen to live in an apartment but that's about it. What’s different about it is how it’s appraised and how it’s financed. Commercial real estate’s value is based on the net operating income that it generates, not on the value of the neighboring properties like your home would be. When you finance the property you will not get a 30 year fixed rate loan like you would on a house. It will be a 10 to 20 year amortization but it will be due in full in 5 to 7 years with a balloon payment. You either pay it off or you refinance. Nearly everyone refinances.
Let’s say you bought a commercial property at 3.5% to 4% interest and your payments were $10k per month. You collect enough rent to pay that amount plus make $5k/month in positive cash flow. Then your 5 years are up and your loan is due to refinance only your interest rate is now close to 8% and your monthly payment is maybe $18k. You are now in negative cash flow territory. Your lender will now say your property value has decreased and they want you to put in cash to pay down the loan or they won’t renew. That’s where a lot of commercial property owners are today. In todays world when the lender says put in more cash they’re talking about paying down to at least 60% of the value. If you have a $2 million property that was just revalued to $1.5 million and you still owe $1.2 million the lender might ask for another $300k or more. If you’re a small investor you might not have it. So you can either sell the property, find a different lender willing to take the loan(doubtful), or hand the property over to the lender.
They're Selling
So today I’m seeing a lot of commercial properties for sale for that reason. Here’s the catch. They aren’t necessarily selling at distressed prices to get a quick sale. They’re hoping someone will buy at a price that will give them back most of their equity. This is the trap for the new buyer. If they are selling the property at a 6% cap rate(rough calculation of investment return) and the new buyer’s interest rate will be 8% there’s a problem. Those numbers should be flipped. A cap rate 2% over the interest is acceptable. 2% under the interest rate is not. Some sellers are about to get desperate. Some are not. Why? Many investors have non-recourse loans on these properties. They can hand them over to the bank with none of the usual consequences. They lose their equity but that’s it. So they don’t necessarily care.
The Time Is Coming
Over the next year is the time to make insultingly low offers on commercial properties. Especially if you are looking at multi-family because these numbers scale up from one or two million to $50 million to $100 million. Of course you need to have the resources to do a deal like that. It’s not for everyone and certainly not where I want to be. But the deals are there. Scale back down to smaller properties for a minute. In my market there are A LOT of small industrial properties sitting empty, many of them new construction, never been occupied, and some that are occupied. They are coming up on their loan renewals. Owners are trying to sell but they are not yet coming down to a reasonable price based on interest rates and net operating income of the property. Please don’t get caught in the trap of buying those properties at their current prices just because they might currently be cash flowing. That could all change when the loan gets renewed or when a sale takes place and new interest rates kick in. Be aggressive in your offers. Don’t be afraid to low ball a seller. Same is true if you are buying from a lender, and we are getting into that scenario now. When buying from a lender, offer less than their outstanding loan amount. Trust me, they don’t want to own real estate especially if there are vacancies. This will hold across all commercial real estate property types. Take your pick and be patient. Somewhere between $1.5 Trillion and $2 Trillion in commercial real estate loans will come due between now and the end of 2027. Should be an interesting time. The fallout from that could spread far beyond real estate. Think retirement accounts.
Thanks to all our readers and welcome to the new subscribers! I hope you enjoy the newsletter!
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