Why Banks Offer the Same Rates for New and Old Multi-Family Properties

Let’s take a closer look at this question, specifically in the context of multi-family properties.

At first glance, it might seem logical that newer properties would qualify for lower interest rates. After all, they’re less likely to need major repairs, often attract higher rents, and typically come with lower capital expenditure (CAPEX) risk. But that’s not how banks usually think.

The Banks's Perspective

When banks determine interest rates, they primarily focus on a few key factors:

- Borrower’s creditworthiness
- Loan amount
- Loan term
- Current market conditions

Notice what's missing? The age of the property.

Here’s a breakdown of why that is:

1. Risk Assessment

Banks evaluate you, the borrower, not just the building. A strong credit score, reliable income, and solid financial history reduce risk in the eyes of a lender. Whether the property is brand new or 50 years old is secondary to the borrower’s ability to repay.

2. Collateral Value

The property serves as collateral, but what matters is its current appraised value, not necessarily how new or old it is. If the property appraises well, even an older building can support a strong loan.

3. Market Conditions

Interest rates are driven by broader economic forces: inflation, Federal Reserve policy, investor demand for mortgage-backed securities, etc. These affect all mortgage loans, regardless of the property’s age.

Should Property Quality Matter More?

I think so.

Having walked through countless multifamily buildings—some in pristine condition, others complete fixer-uppers—I can’t help but question this standardized approach. I've seen how a $30K kitchen and $10K bathroom renovation might only yield a $200/month rent bump. That’s a long ROI horizon and a real financial burden for investors.

So here’s the big question:

Wouldn’t it be more prudent for banks to offer better rates on higher-quality, newer properties?

In theory, yes. Newer properties often require less CAPEX, have lower maintenance risks, and can attract better tenants. That should translate to a lower risk for the bank—and, logically, a better interest rate for the borrower.

Flaws in the Traditional Appraisal Process

The three standard methods of valuation—comparable sales, income approach, and cost approach—all have limitations:

- Comparable Sales can be wildly inconsistent, especially when neighboring properties vary greatly in condition.
- Income Approach is useful but doesn’t account for hidden future costs (like a $20K roof replacement in 3 years).
- Cost Approach often glosses over the real-world quality and age of systems like HVAC, plumbing, and electrical.

In short, these methods can miss key nuances that materially affect the risk of the deal, both for borrowers and lenders.

A New Way Forward?

Imagine a lender that factors in long-term building health, deferred maintenance, and CAPEX risk into their pricing model. A bank that rewards buyers for investing in quality, low-maintenance properties. That could be a game-changer.

Now, the challenge is to find a bank that sees things the same way.