Apartment underwriting with rising interest rates

[Matt Heath]

Hi All,

I would like to hear from some investors about how you underwrite/forecast the exit on apartment deals within a rising interest rate environment. Specifically speaking about value add/micro reposition deals. 

Unless you go agency money, you are typically stuck with 5 YR ARM loans and from my understanding when interest rates rise, this can increase CAP rates on the exit when selling.

How do you ensure you are able to cash out refinance all your money, continue to grow your portfolio, but also without going under the 1.25 DCR on a deal? Would love to hear all strategies or thoughts on this.

Thank you! 

[Taylor L.]

Originally posted by @Matt Heath:

@Rick Martin Thank you! I have heard the .5% increase in CAP rate on the exit from some other investors. Is that a fairly conservative approach? Also, is there a correlation between the prevailing CAP rates and mortgage interest rates? Thank you for the information on how to find the current market CAP rate! I will make sure to look those up!

Correlation between cap rates and interest rates has been a topic of lengthy discussion on BP. @Brian Burke has written some of the most salient posts on the topic.  Here's an excellent one: https://www.biggerpockets.com/...