Strategies for high Interest Rates?? REFI? Numbers don't add UP!

Multi-Family and Apartment Investing
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Strategies for high Interest Rates?? REFI? Numbers don't add UP!

Jacob SloopBusiness Member
Rental Property Investor · Virginia Beach, VA · Member since 2020 · 274 posts · 111 votes

Hi All,

-Looking for advice and to start a conversation with you experienced operators on here about strategy moving forward around these high rates! Including refinances...yikes

-Seeing that multifamily projects usually revolve around a short timeline, 5/10 years how is that affecting your underwriting and confidence moving forward?

- AND how about anyone that is facing a refinance currently??  I'm sure that people didn't project into their numbers a 9% interest rate refinance 5 years ago..  maybe some did but the line between being conservative and actually using a reasonable margin is a thin line sometimes

This is a daunting prospect, especially with other peoples money involved in a project..

-Now surely this cycle will ride itself out over the longer term but for those looking to acquire property in the now and plan on a value add component,  its almost gambling on the future refinance...not the position most are comfortable being in with millions of dollars involved.

I have been running properties through the syndicated deal analyzer and other DSCR spreadsheets only to find inadequate COC, cash flow, AAR, you name it! Even with my "lowball" offer plugged in.

What are others thought? Experiences?

[email protected]757-235-0369
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Chris SeveneyBusiness Member
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Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
3y

@Jacob Sloop

I was speaking with a large MF operator (2B+) and they noted MF market transactions are dead right now. Pencils are down in new projects and there are no transactions going on until a clearer picture on interest rates and cap rates adjust due to the rate environment.

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  • Joe Fritton
    Real Estate Broker · Grand Rapids, MI · Member since 2022 · 21 posts · 14 votes
    3y

    There are a couple of savvy solutions that I'm seeing my borrowers use. On the refinance, most of the market analysts that I follow are saying that we will see interest rates only begin to come down again in 1 to 2 years after the Fed stops tightening. So, my borrowers are asking me to set them up with 2 to 5 year interest-only loans with little to no prepayment penalty. When we compare the PITI payment of an amortized loan to an interest-only payment, the I.O. helps support maximum revenue in the short term.

    5 year loans are offering less LTV, but also offer a better rate and the security of not needing to disposition for a longer term. 24 month loans will see the highest rates, but will provide greater LTV, if needed, and the most prepayment penalty you'll usually see is 3 months. Either will allow us to wait out the worst of the volatility and target new solutions when we see a rates come down.

    Regarding a value add purchase, this can be approached with by a prudently conservative underwrite of the deal. I use some very pessimistic assumptions for the future NOI, cap rate, loan rate and rent growth. If the deal still works with some worst-case values, then we've protected ourselves against poor future outcomes. I can still close loans at up to 85% LTC, so the purchase LTV is typically workable and the full budget is provided. Currently, it's hard to cash out on the refi, so it would also be a good idea to get quotes from a takeout lender ahead of time so that you can better predict your future cash position.

    Best,

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  • Eliott Elias
    Investor · Austin, TX · Member since 2021 · 9k+ posts · 5k+ votes
    3y

    It sucks, but it's the playing field right now. Rates are high and properties are not cash flowing, but deals are out there for the taking and there is no shortage. You just have to embrace this market and play. 

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  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    3y

    @Jacob Sloop

    I was speaking with a large MF operator (2B+) and they noted MF market transactions are dead right now. Pencils are down in new projects and there are no transactions going on until a clearer picture on interest rates and cap rates adjust due to the rate environment.

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  • Jacob SloopBusiness Member
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    Rental Property Investor · Virginia Beach, VA · Member since 2020 · 274 posts · 111 votes
    3y

    @Joe Fritton

    Thanks for the insight Joe!

    Interest only would certainly improve you cash flow. Is there a minimum loan size lenders are looking at for this ?

    [email protected]757-235-0369
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  • Jacob SloopBusiness Member
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    Rental Property Investor · Virginia Beach, VA · Member since 2020 · 274 posts · 111 votes
    3y

    @Chris Seveney

    Chris I’m not surprised to hear this. Thanks for sharing.

    I have seen news of a lot of layoffs in the big companies .. I think the effects will be felt for awhile

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  • Joe Fritton
    Real Estate Broker · Grand Rapids, MI · Member since 2022 · 21 posts · 14 votes
    3y
    Quote from @Jacob Sloop:

    @Joe Fritton

    Thanks for the insight Joe!

    Interest only would certainly improve you cash flow. Is there a minimum loan size lenders are looking at for this ?

    The more important minimum for MF properties is per door value. Most lenders seem to want $50K per unit for MF, so unless you're buying class C- properties, the min value won't be an issue. I should also mention that many 30 DSCR loans can lend on small MF and offer I.O. periods up to 10 years.

    There's options!

    Best

    1Reply
  • Timothy VanWingerden
    Real Estate Broker · Lexington, KY · Member since 2017 · 131 posts · 129 votes
    3y

    Price has softened a lot in recent months. Operators are looking at deals with lower leverage, 60-70% LTV so that they have a 1.25 DSCR on trailing financials. The lower leverage will of course bring the cashflow down a bit but it is justified given a higher cap rate.

    Deals that are underperforming or just completely disconnected from the massive rent growth we have had the past 3 years, make the higher interest rates a little bit more manageable as there is additional revenue capture available in rent increases. The deals that are a little bit more stabilized are just not clearing what they were in price in 2021. I'm talking to investors every day who are still buying but they are pricing in the cost of capital at it is absolutely changing the market. 

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