Today, I’m going to share with you how this 10-year Treasury chart might help you as a real estate investor…
Doing your first deal?
Want to potentially:
- Maximize your leverage?
- Increase your cash flow?
- Understand how to navigate risk… ESPECIALLY in today’s volatile market?*
Then check out the chart below.
*Results not guaranteed. See full disclaimer below.
WHAT IS THE 10-YEAR TREASURY?
Source: Board of Governors of the Federal Reserve System (US), Market Yield on U.S. Treasury Securities at 10-Year Constant Maturity, Quoted on an Investment Basis [DGS10], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DGS10, January 18, 2023.
First, let’s talk about what the 10-year Treasury is.
When the government wants to borrow money, it issues bonds like the 10-year Treasury.
These are basically loans that investors can buy from the government…
And then the investors get paid a fixed interest rate in return.
In turn, the government promises to pay back the bond’s face value (or “principal”) to the bondholder after 10 years.
WHAT’S THE 10-YEAR TREASURY GOT TO DO WITH SECURING DEBT FOR A DEAL?
The 10-year Treasury yield is often used as a benchmark for interest rates on other types of loans, including:
- Commercial loans
- Personal loans
- Mortgage rates
- Credit card rates
This means that when the interest rate on the 10-year Treasury goes up or down…
The interest rates on other loans may also go up or down.
By keeping an eye on the 10-year Treasury yield, you can get an idea of what to expect when you’re looking to borrow money.
WHY SHOULD YOU LOOK AT THE SPREAD BETWEEN DIFFERENT INTEREST RATES?
The spread between your loan’s interest rate and the 10-year Treasury yield can give you an idea of:
- The potential returns on your investment
- How risky your loan is considered to be
- How it is affected by the overall market conditions
When we talk about the “spread” in this context, we’re referring to the difference between your loan’s interest rate and the 10-year Treasury yield.
So, if the 10-year Treasury yield is 1% and your loan’s interest rate on your loan is 2%…
Then the spread would be 1%.
This means that your loan is charging 1% more in interest than the benchmark rate.
The spread can be used as a way to measure the relative RISK of a loan.
Generally, a LARGER spread could mean that the loan is considered to be relatively MORE risky…
But it could also have the potential for HIGHER returns.
A SMALLER spread, on the other hand, could mean that the loan is considered to be LESS risky…
While it might have the potential for LOWER returns.
HOW DO YOU APPLY THIS TO YOUR FIRST DEAL?*
*Note: This is based on my personal experience only. You should always do your own research and due diligence, and seek a licensed professional’s guidance before investing in real estate. See full disclaimer below.
#1 – Keep track of the 10-year Treasury yield in real time every day.
If you want to know what interest rates to expect on your deal’s loan…
You can look up the 10-year Treasury in real time on many websites and investing apps.
This number changes day by day, especially in a volatile market like today’s… so keep a close eye on it.
#2 – Find out the potential interest rate for your loan.
The next thing you need to do is find out the potential interest rate on the debt you might be securing.
So let’s say the 10-year Treasury yield is 3.5% right now.
To figure out your loan’s potential interest rate, add 200 bps (basis points) or 2% to the 10-year Treasury yield.
This tells you that your loan’s potential interest rate is 5.5%.
#3 – Check the potential yield on your stabilized returns.
Stabilized returns refer to the steady and predictable income that a real estate investment could generate over time. This could come from steady cash flow and a relatively low level of vacancy.
It’s important to note that stabilized returns don’t necessarily mean high returns.
All it means is the potential for consistent and predictable returns.
So, if you want to see how PROFITABLE a deal could be…
Then add AT LEAST 250 bps to the 10-year Treasury yield when underwriting a deal.
Simply put, this is what you’d like to see when underwriting your first deal:
Potential Stabilized Return Rate = 10-Year Treasury Yield + Min. 250 bps
#4 – Determine if you should keep pursuing the deal, or move on.
So if you’re unlikely to get those stabilized returns on your first deal….
Then you should probably move on and find better deals with enough “cushion” (cash flow) to:
- Support any trial and error on your first deal…
- Potentially return capital to your investors.
In a market like today’s, I would act quickly and swiftly to snap up opportunities…
And using the 10-year Treasury yield as a benchmark is a great idea.*
I hope you find this helpful and continue to seek greatness in your real estate game.
*Real estate investing can be risky, and you should always do your due diligence and research first. See full disclaimer below.
Disclaimer: This content is intended to be used for educational and informational purposes only. Before investing, you should always do your own analysis based on your own financial and personal circumstances before making any investment. Grant Cardone is an industry expert who has been investing for over 30 years and his opinion is based solely on his own personal experience and circumstances. Individual results may vary. You should perform your own due diligence and seek the advice from a professional to verify any information on our website or materials that you are relying upon if you choose to make an investment. Investment involves great risk and there is no guarantee of performance or results.
We are not attorneys, investment advisers, accountants, tax professionals or financial advisers and any of the content presented should not be taken as professional advice. We recommend seeking the advice of a financial professional before you invest, and we accept no liability whatsoever for any loss or damage you may incur.