Rising rates - what is your plan

3 Replies

The Fed is telling us that rates will continue to rise.  Interest rate risk might be the most significant risk if you are borrowing.

Look at a historical prime rates http://www.fedprimerate.com/wall_street_journal_pr... .  

If we get into a period of 10 to 20 years averaging 9, 10, 11 percent prime, what is your plan?  

Rising rates and balloon payments coming due is a great way to clear the market.

Lock in as long of a term as possible. If you are at a floating rate and can lock in for 7-10+ years then you should be ok. If in 10 years the rate is 11%, you will have paid down your principal balance significantly and likely inflation will have happened, so your rents will have increase (and expenses), resulting in still solid cash flow. 

@Chad Linn I don't see us getting to those levels anytime soon, but I do think we'll see the next several years with 5%-7% perm rates. I don't think we'll see runaway inflation like we did in the early 1980's, which caused Prime to spike. Inflation has been growing at a controllable pace and pretty much in line with the 2% target (although the Fed is talking about raising that target).

@Todd Dexheimer is right about locking in to a longer term - I'd also look for longer amortization to improve cashflow. Multifamily is the best asset class for longer rate/am as Fannie can go for 12, 15, 20 and 30 year terms and both GSE's have 30 year ams. For lower leverage deals, say sub 60%, some banks and life insurance companies allow you to forward rate lock up to 12 months prior to close. Helpful for anyone with a maturity in 2019 that's worried about where their rate will be.

@Chad Linn  If you are still at floating rates, start shopping around to see if you can lock in for as long as possible. I don't believe the rates will rise forever. We have been in a stable and growing economy for a while, a downturn is very likely, which will definitely lead to rates stabilizing.  

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