Just thinking this through, and though I would put this out there and get BPers thoughts.
Overly simplistic example:
You purchase a 100 unit class C multi family in a class B area. It has significant potential as a value add investment. So you raise money from your investors. Let's say it's a $1mm property your raise $250k for the down payment and bank finance the rest. It takes you 5 years to rehab all the units and raise rents 20%. Assumptions: 10% cap rate, $100k NOI. After raising the rents NOI is $120k the value of your building is now $1.2mm. Your plan was to refinance with the bank and cash out your investors. But you can't because interest rates have risen and has put pricing pressure on the housing market. What you thought was going to be valued at $1.2mm isn't, maybe it's flat or just slightly up.
Knowing that the value of commercial property is driven by NOI, rising interest rates still have to put some pressure on pricing since cost of capital has risen and de-risking will occur. It's basic economics, lower risk investments now offer higher rates of return, therefore investor's de-risk (sell higher risk assets, move down the risk spectrum to get similar returns with lower risk). That puts price pressure on these high risk investments (i.e. real estate). What is the exit strategy in this case for your investors? The search for yield has caused, as a general statement, many real estate markets to become overpriced. With multi-family prices in many markets at all time highs and the imminent Fed rate raise are investor's setting themselves up for trouble in years to come?
GG
