Planning assumptions about higher rates in the future

Rental Property Investor · Venetia, PA · Member since 2015 · 107 posts · 47 votes

I'm looking at a five unit that cashflows well given a 5% 20-year, 20% down commercial loan.

I have no personal experience with commercial loans. I'm aware that most become adjustable after a period of time. Given that fact I have to plan on rates being higher in the future and my cashflow margin then decreasing. I'm guessing refi wouldn't make sense because I'd just be able to refi into another, higher rate loan. So in a higher rate scenario I'd be stuck with dwindling cash flow or worse, be losing money

Any opinion on the validity of my assumptions here? What am I not considering here?

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Brendon Woirhaye
Rental Property Investor · Whittier, CA · Member since 2014 · 325 posts · 268 votes
9y
Rates could go crazy like they did in the late 70's, but more likely they will not. Rates are pretty darned low in the scheme of things, but it may take them a few years to go up much. Unless you have a good crystal ball, though, it's all a guess as to where they will be in 5 years or 7 years.
Your loan will probably be fixed for a certain period of time, like 3 or 5 or 7 years, and then matched to an index plus a spread (eg: 12mo LIBOR +2.5%). You pay more the longer the fixed time is. I just did a commercial loan a couple months ago and I opted for one with a 5 year fixed period. I mapped out different scenarios of where I'd be ahead depending on what rates were after different periods of time, but that's mostly just guessing. Many loans also have a limit as to how much they can adjust in one year, so they may rise slowly.
Figure how high the rates would need to be to be cash flow negative. If they don't need to go up very far for you to be losing money, then the deal is no good.
Keep in mind that other expenses will change over the next x number of years as well - property taxes, cost of labor for maintenance and repairs, utilities.. but your rents will also likely increase.
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Joel OwensBusiness Member
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Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
9y
Most of my clients for retail properties get a 10 year fixed in the 4's with a 30 year amortization. The properties are usually 4 million and up in price so these are not mom and pop type stuff that is oddball and only local banks want.
The assets are generally in desire able locations that multiple different types of lenders ( banks, credit unions, CMBS, private,etc.) all want to loan on.
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