IR Risk on MF CF

[Christopher Cruz]

A few of you may have read that I'm on the prowl for my first investment inreal estate. I'm patient and have no problem waiting for the perfect property.

However...

In the later half of 2013, once Bernanke is no longer holding the rates down, IR will begin to rise.

My primary concern is the effect rising interest rates will play on CF strategies when acquiring real estate through the means of borrowing.

Just wanted to start a discussion and get different perspectives on the topic at hand.

Thanks guys!

[Joel Owens]

Anything I do I am trying to outpace inflation. As a portfolio grows you have more risky and less risky projects to diversify holdings.

The biggest concern with a property is the debt financing. How long do you plan on owning it and what will be the balance due at the end of maturity??

Many banks are giving only 5 years loans for term on commercial stuff. Unless you are going to sell or be able to pay off it is a horrible loan for that short time period. Even if you throw extra cash flow payments at it the debt balance will still be pretty when the note comes due and you will have refi costs and an interest rate that will likely be higher than what you have today.

With a 10 year term at least you can affect the pay down of the debt service more significantly with additional payments. You can play out worst case scenario and see what happens.

For instance on your model you can go out 10 years and say if you pay regular payments and this much cash flow and repairs then your debt balance will likely be XX in 10 years. Then you can compare a rate of say 6.5% today and look at a rate down the road of 10 to 11% worst case for the new loan and see with moderate rent increases what that payment and picture would look like.

Of course in 10 years many types of new loans can emerge that affect the numbers of a property. Nobody has a crystal ball. It's like Richard Branson the billionaire says " Every investment is a risk. Risks are okay as long as you take controlled risks by analyzing the data and making a sound decision"

So nobody can predict what will happen but you can put things more in your favor by planning for possible outcomes.