Financing Transactions in Difficult Interest Rate Environment

[Stuart Udis]

The current interest rate environment has made financing real estate a challenge. It now appears interest rates will remain higher for longer than most expected and decided to use this forum as an opportunity for members to share strategies and resources used to navigate the challenges brought on by the higher interest rates. On a personal level, I have found rental properties that seem to have everything going for them (new construction w/ low operating expenses, 10- year tax abatement etc.) are being limited to 60-65% LTV as the 1.2-1.25 DSCR lenders rely on are impacted greatly by the interest rate component in their analysis. Therefore on refinances I am experiencing more equity left in deals and on new acquisitions more equity being required. Some initial ideas that have come to mind are to seek out lenders who may lean less heavily on DSCR (although I am finding this to be a backstop all lenders I have engaged rely on), utilizing more LP equity on new acquisitions, and incurring higher finance charges to originate loans where lower or no pre-payment penalties exist to provide the greatest flexibility to exit any recently originated loans when rates calm. Setting aside the interest rates, I am finding opportunities I perceive to be good value, and it's just a matter of navigating the next few years. Interested in hearing how others are navigating the financing and capital stacks in their transactions.