This article was posted on Thursday, Jan 01, 2015


When we talk about underpriced units, we are not hoping to somehow buy a $1,500,000 building for $1,350,000. Buildings like that are hard to find, but even if found don’t really make too much difference over the long term. Over a 30 or 40 year investment career, a ten percent discount on the original market price becomes simply a rounding error.  

In 35 years $1,500,000 appreciating at 4% (annually compounded) becomes $5,900,000 (rounded). What is $150,000 compared to that?

There’s a reason it’s hard to find deeply underpriced apartment buildings in the popular listing sites (MLS,, Loopnet, etc). These pages place available properties in what is basically a public auction (albeit, with a reserve price), and competitive bidding causes properties to sell for pretty close to their full market value regardless of the listed price. An over-listed project will sell if less. An under-listed building will receive multiple overbids 


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Whether we shop for shoes or buildings, we’d like a wide selection of purchase candidates. We’d like buildings whose values might reasonably increase over time faster than the historical average. Basically, we want to buy when the market as a whole is underpriced. There’s a way to do that. 


To determine whether or not the market is under (or over) priced it’s necessary to find a reference, a point about which the leveraged-asset market fluctuates. A floating reference is not actionable. The reference must be fixed. We need a big rock offshore so we can, at a glance, determine the state of the tide.   (“What happened to that big rock, Lucas?” “It’s underwater, Elias. Tide’s up.”) The rock is the reference; the tide is the variable. We will manage our investments differently when the tide is high than when it is low.

There are two necessary characteristics for any actionable reference point: (a) it must be sensitive to the economic climate (you can accurately judge the state of the tide by where the water laps against the rock), and (b) it must be easily monitored (“Just look out the window, Elias”.) Interestingly, lenders use a reference with these same characteristics when pricing a loan application.

Any lending rate, even a fixed rate, is composed of two elements, the index and the margin. The margin is the lender’s gross profit. It is their incentive to make the loan. The lender’s margin does not change during the life of the loan. Because the margin is fixed it is not sensitive to changes in the economic climate and thus not relevant to this discussion.

It’s an entirely different thing with the index. The index is the variable portion of the lending rate. An index reflects the yield on an alternative investment that the lender might invest in if quality loan applications dried up. It establishes the reasonable interest rate the lender could earn on a liquid investment with zero credit risk.  

There are many indexes, but a common one is the 10 Year Treasury note (market symbol: TNX). The TNX perfectly meets the two hurdles required to be a reference point. It is sensitive to the economic climate: it changes moment to moment during market hours and is quoted to one hundredth of one percent (i.e., to one basis point). That amounts to a value change of $10 on a $100,000 investment. And it is easily monitored: just Google TNX on your Smartphone.  


We’ve seen the graphs. We know that interest rates cycle above and below their historic long term average. Rates may be low right now, but eventually they will rise above their long term average. And once they are high they will one day reverse and dip to below their historic average. At that point everything starts all over again. We can benefit hugely from allowing the interest rate cycle to inform our investment decisions.

One of the things that is important to know is the index’s long term average rate. That’s the rock. Current rates are the tide. Only by referencing current rates to the long term average will we know if current rates are “high” or “low”. 

TNX Average                       

Over the last 50 years (1965 – 2014) the ten year Treasury note has ranged from 14.59% (1982) to 1.97% (2012), with an average of 6.57%. On the day this is written it is 2.17%.

Knowing the long term average rate of the 10 year Note is important to our discussion. The investor can make decisions based upon the relationship between today’s rate and the historical average. When the TNX is beneath 6.57% (the long term mean) it tends, over time, to rise. If it is above that yield, it tends to decline back towards the mean. This is formally called Reversion to the Mean. That’s what statisticians say when they mean “go back to the average”. Of course, the ever-adjusting yield doesn’t just strike the long term average (“mean”) and abruptly stop for cookies and tea. It often overshoots the mean in either direction. And just because the current 10 Year rate is below / above its average does not mean it won’t drop / rise further before reversion appears. So there’s some uncertainty in this, but that’s ok. Savers look for certainty; investors seek opportunity.

Reversion to the mean is an important concept for the investor who is in the market over the long term, as apartment investors are. When the TNX is yielding below its mean (“average”) of 6.57% it is probably a good time to refinance.  Remember the cap rate formula: “Rates low, values high?” Each dollar of NOI will support a higher loan burden when the TNX is low than when it is high. That means that if you refinance while the TNX is low, you’ll get more cash out.

A high rate on the TNX (above 6.57%) would mean apartment values are low in relative terms (“Rates high, values low”). That’s probably a good time to buy. 

If you buy when the TNX is high, then as rates decline to their long term average the building’s NOI is capitalized at ever lower rates and the value of the building goes up, even if there is no change in the net operating income. Of course, there generally is an increase in NOI over time. When a higher NOI is capitalized at a lower rate, well, that’s one of the things we live for. It’s what made so many investors wealthy between 1982 and 2012: NOI increased and cap rates decreased for 30 years. Times like those will come again when the economy cycles through to the back (declining) half of the next interest rate cycle. 

A low TNX (low meaning the rate is below 6.57%) means that apartment values are high in relative terms. During this half of the interest rate cycle long sighted investors refinance and park the money somewhere safe. When the cycle turns and rates begin to go up, the investor will be able to buy more units as their prices decline. Think, for example, of buying a building when the TNX was at 9% and how the building’s value would be affected as the 10 Year Treasury slipped to 4%. At a 9% cap an NOI of $100,000 would be worth $1,110,000. At a 4% cap the same $100,000 would be worth $2,500,000.  


We know that interest rates will change, we just don’t know exactly when. And, although we can’t be absolutely sure how high (or low) they will go, we can expect that most of the time interest rates will be pretty close to their mean. To estimate how close, we must glance at its standard deviation.  

Standard Deviation  

The standard deviation (S.D.) measures variation around the mean. It is very specific. One standard deviation around the mean contains 68% of the samples. Two S.D.s contain 95%. As an example, if the mean was 10 and the S.D. was 2, then 68% of the samples would occur between 8 and 12 and 95% between 6 and 14.

The 10 year Treasury note over the last 50 years has demonstrated a S.D. of 2.74, meaning that 68% of the samples were within the range of 6.57% plus or minus 2.74%. Basically, the TNX yield has been from 3.83% to 9.31% for 68% of the last 50 years. That’s probably the range where most people will spend most of their investment careers.  

Final Word               

For clarity, 6.57% is not the average mortgage rate over the last 50 years. It is the average rate of the 10 year Treasury note index only. The full mortgage rate would add an appropriate margin (typically running 2.0% or more). 


  • The investor should consider managing his portfolio with an eye towards benefiting from the inevitable trend shifts in interest rates.
  • The average TNX index yield over the last 50 years has been 6.57%
  • About 2/3rds of the time TNX index yields have cycled between 3.83% and 9.31%
  • When rates are low (values are high) it’s time to refinance.
  • When rates are high (values are low) it’s time to buy 

This article is for informational purposes only and is not intended as professional advice.  For specific circumstances, please contact an appropriately licensed professional. 

Klarise Yahya is a Commercial Mortgage Broker. If you are thinking of refinancing or purchasing five units or more, Klarise Yahya can probably help. Find out how much you can borrow. For a complimentary mortgage analysis, please call her at (818) 414-7830 or email [email protected]  

If you’ve missed some of the prior articles, basic guidelines on successful investing are in my book “Stairway to Wealth” available at