Commercial or MFH - what happens after the 7 yr fixed rate is ove

[Diane G.]

Read several times on here that people bought commercial or MFH and plan to hold 5-7 years...What happens if the market turns the other way and you can't sell, AND the fixed rate expires and you are now facing a higher rate? 

I know people dont think about these things in a good market like today's... But what happened to those in the game back in 2008/2009? Did they all survived or wiped out? 

[David Thompson]

Diane

I think it depends on how you are playing commercial when you say it scares you off. If you are buying without consideration for adding value to the property, you are putting yourself at a much higher risk when a downturn hits. Since as you are probably aware, commercial property value is based on the NOI, if you simply purchase properties that you can't improve through renovations or improving the operational efficiencies of the commercial properties, simple buy something and hold it, when the income drops because you have to lower rents to keep tenants / residents in tact, the value of the property declines.

However, if you buy w/a value bent, you are essentially able to create more NOI and weather downturns better providing somewhat of a cushion. The default rate on MF loans was about 1% during the last 2008 downturn but for residential it was up to 5% and higher in some markets like Vegas and Phoenix. For MF operators w/experience, who's model was buying value add in solid (not over exuberant) markets the default rate was almost nil.

We have a partner in Houston who is vertically integrates (acquires, manages and renovates) their own properties of B/C class apts.  Two years ago when oil dropped from $100 to $50 barrel, their occupancy actually went up slightly from 92 to 93% while Class A fell off a cliff in some areas down 20% or more.  

Value add owners also do the following after they have purchased these properties. They will add massive value in the first few years, hence the NOI is optimized, then the property is refinanced, pulling out equity and reducing the owners risk further. We don't wait ten years for appreciation. We get if by forcing it. It's not even uncommon to go w/interest rate only loans even in today's market w/options to lock since we still are getting very attractive rates

Bottomline, when you state commercial, that's too general.  Value add B/C is quite different from buying class A or just commercial at market.  The former can make it thru tough times, the latter has a higher risk.