Is anyone changing their buying criteria because of the bond market?

Question

There has been a lot of movement in the bond market lately, and I think some investors underestimate how quickly that can affect financing.

People tend to focus on what the Fed might do next, but longer-term rates can move quite a bit without the Fed changing anything. That can cause pricing on a deal to look different from one week to the next.

For me, the bigger issue isn’t just the rate. It’s what the higher payment does to the exit.

A rental that barely worked at the original refinance assumptions may no longer work if rates move another quarter or half point. The same applies to a flip where the end buyer may have less purchasing power six months from now.

I’m not saying investors should stop buying. I do think deals need a little more room for error right now, especially when the strategy depends on refinancing quickly or selling at the very top of the projected value.

Has the recent rate movement changed what you’re willing to pay, or are you still underwriting deals the same way?

Jimmy Lieu · Answer

Great point, John. I’ve definitely become more conservative with refinance assumptions when underwriting deals. I think the biggest mistake is making a deal work on paper only because you’re assuming rates will be lower by the time you refinance or sell. I’d rather underwrite using today’s financing environment, stress test the deal another 0.5%–1% higher, and make sure there’s still enough cash flow or margin to be comfortable. For BRRRRs especially, I’m paying closer attention to the projected refinance payment, DSCR, and how much cash could realistically be left in the deal if the loan proceeds come in lower than expected. On flips, I’d rather use a reasonable resale value than depend on appreciation or stronger buyer purchasing power six months from now. If rates improve, that becomes upside instead of something the deal needed to succeed. I’m still buying, but the purchase price and margin have to account for that uncertainty.

Sarah Jones · Answer

We've definitely tightened our underwriting to require a wider spread between purchase price and ARV, since that exit buffer gets eaten up fast with even small rate moves.

John O'Leary · Answer

@Jimmy Lieu I Like it. Plan for war in times of peace!