Cash-flow expectation as interest rates increase

[Charles H.]

Hello BP,

wanted to have your insight when you guys run your numbers and also how you adapt as interest rates are on the rise.

I tend to follow @Brandon Turner numbers (100$/month/door & 12%CoC for apartments). And a DCRS of at minimum 1.3 (bank loan requirement).

- Do you guys follow the same requirements?

- Do you lower your CoC and monthly CF as interest rates increase or do you look for a better deal?

Most of the local banks offers me a 20 years/6%ARM (not a fan of ARM...) so it makes it tight to reach my expectations. And in addition, sellers know there is demand for MF so they jack up their selling price and i usually end up with a, what it seems to be, a low ball offer all the time.

Thanks for sharing your thoughts. 

To our success.

CH

[Joel Owens]

Multifamily is a tough nut right now for peak cycle in most markets. Don't buy just to feel like you have to be DOING something.

What's worse than not finding a property to buy? Buying a property with bad debt so that when the right property comes along you can't buy it. That is what is worse.

ARM's are usually crap and worthless. I tell those lenders to go spin and not interested.

If you do 5 year fixed money in commercial the lenders can stress test a property at  a higher interest rate than you are getting. Example you get a 5 year fixed at 5.0 percent with a 25 year amortization but underwriter for the bank uses 6.5% loan constant over a 10 year period for qualifying metrics. The reason is they want to see if you refi or have a 5/5 loan where interest rate goes to market in year 6 if the property will still be okay or not.

If doing a 5/5 I like where years 6 to 10 has a ceiling. Example first five years fixed at 4.8 then for years 6 to 10 can go no higher than 6.5% ceiling. That way I can play out and model worst case situation. If bank leaves open and year 6 is 7% rate or higher bank might require additional cash down to make the numbers work.

I like 7 to 10 year fixed loans better even if rate is lightly higher. Example a rate of 5.2 for 10 year fixed with  a 25 year amortization is worth more to me then 5 years at 4.8 then can go to open market. In that situation my blended interest rate over a 10 year hold can be way higher than the 5.2%. Writing in loan assumption rights for a buyer can be huge as well when you sell when rates have gone up in the market in future years.

Remember lenders say nothing is negotiable but really that is untrue. If some want to do loans they will bend on certain items. If they are just luke warm about those types of loans they give crappy loan terms take it or leave it. If the deal size you are buying in is too small to get optimal loan terms you may want to partner on a larger deal where multiple lenders will compete to fund it.