Where Are Rates Going? (real estate investing)
For those of you following my progress with Monica Main’s Apartment Building Cashflow System, or if you’re trying to get financing for you own apartment building, I thought you’d like to see this email I received from Mr. Tracy A. Beer, Managing Director at MCB Madison.
There are many things to complain about in financing these days, but rates are not one of them. We are still enjoying Historically low rates. People say historically about a lot of things, but these rates really are unusual. In the last 40 years, rates have been at 7% or lower only 3 times. Up until the early 2000’s rates have gotten this low for only a total of about 2 years of market time.
Fannie can get under 5% on low leverage deals, Banks can do things in 5’s and Lifecos can reach into the low 6% range on some things. This is cheap rent for capital!
Going Up?
Lot’s of talk out there about rising rates. Here’s what we think will impact rates in order of how soon it might happen.
1) The Feds have been buying massive amounts of Residential loans and paper. This was to help keep rates down for Home-owners and Buyers. The Feds are now backing out of the market and will be entirely divested by early March. Residential rates WILL rise then and this will likely have the same effect on commercial rates.
2) Higher rates help Lenders heal and helps Lenders overcome risk fears. Lifecos are now starting to quote higher rates for higher loan to value ratios. This makes good business sense and we are a bit at a loss as to why the Lifecos have kept rates as low as they have. This is changing.
3) Fannie & Freddie are very sick, money losing institutions now effectively owned by the Feds. Fannie & Freddie routinely quote well below the competition for no good reason. This will change in the coming few months.
4) As I said, I write this in order of “how soon”. Inflation will come and it will push up rates, just when this will begin to assert itself is not clear.
The biggest problem for Borrowers is getting the loan amount they need. Once rates get to about 8.50% the Debt Coverage Ratios begin to dictate loan amount, as opposed to the LTV’s doing so. When that happens and as rates rise further, the coverage ratio requirements will push loan amounts below even permitted maximums. That won’t be fun.
So what do you do? If you can do a deal now, do it. For deals coming due in the next couple years DO THEM NOW!
