Pre-payment penalty TRAP DSCR loans

[Kenny Simpson]

Many new and experienced real estate investors will FALL into the pre-payment penalty TRAP and it might really bite them in the A$$ or cost them on future deals.  Going through the last 2008 real estate crash many people went with longer term loans (commercial loans) with pre-payment penalties that were yield maintenance instead of step down pre-pays.  Many of the banks that would do multifamily loans STOPPED lending so many people flocked to Agency debt ( Fannie and Freddie 5 + unit loans).  At the time is seemed like the best thing to do but when the market, banks and financing opened up years later and the real estate market started to recover these borrowers quickly realized the pre-pay they locked into, literally TRAPPED them from selling, cash out refi or just lowering the rate.  This caused stress, headache, lost opportunity to pull cash out and buy another property, lower rate and save $$.

Now here comes 2022, I am seeing a very similar pattern that is starting to arise in the commercial loan market,  BUT what has me really concerned for borrower that locked into a DSCR loans that many borrowers locked into @ 7,8,9% rates with a 5%, 5 Year pre-pay or even a 5,4,3,2,1. I wonder if they really understand what they locked into, did they think long term, do they really know the cost of the pre-pay? What if they have to sell? What if there property is negative cash flow and they do NOT have the opportunity to refinance to lower rate/payment? Lots of borrowers did these DSCR loans on STR, investment properties and etc. Will they feel or experience the TRAP.  Could this cost them opportunity or could they even lose the property?

If you are considering a DSCR loan, DONT just look at the rate, look at the whole picture? Think short term and long term. Taking a higher rate, lower pre-pay could make the most sense and flexibility in the future is the way to go.

Everyone that I knew that locked up Agency debt after the 2008 crash and did NOT remain flexible regretted it 100% and it really hurt their growth and kept them out of the real estate game for a long time.  

Thoughts?