Whats the best way to calculate returns with a variable rate?

[Clay Cook]

I’m looking at a commercial loan for a tri-plex, and I want to know what’s the best way to calculate returns when your mortgage rate is a variable rate?

[Evan Polaski]

@Clay Cook, as Justin noted, there is no right or wrong answer, since variable is just that and no one has a crystal ball.

You clearly know your spread and current benchmark rate, so you have an idea of where the rate will be for the next few months.  Given that we are historically low rates, I would model in your cash flow projections that the benchmark rate will be rising steadily over the life of the project/term:  https://www.macrotrends.net/14...

Between 2015 and 2019, 1mo Libor rose from .15% to 2.4%.  If you think we are going to see that same growth, that would mean about 40-50bps per year. I would call the pretty conservative and realistic.  If the deal makes sense at these numbers, I would be happy. And of course, if rates stay low, you end up with more cash flow.