Several months ago before rates jumped higher, I did a video (link below) talking about controlling risk where I discuss the concepts of “Loan to Cost” vs “Loan to Value”.
With today’s higher rates and prices not really dropping (yet), lenders are improving the risk profile and viability of their deals by reducing loan amounts.
For example, if a lender was willing to lend 75% of value on a multi family acquisition loan before, they may now only be willing to lend say 65%.
This makes sense since rates have gone up substantially, the smaller loan amount may have a payment similar to the payment for larger loan amount at lower rates.
Assuming the same rental income numbers, if the mortgage payments and expenses are still the same, the cash flow from the deal would be the same.
The only other way to keep cash flow in an ecceptable range would be to lower the loan amount by lowering the sale price of the property.
In most markets, there has been so much demand that we just haven’t seen prices dropping.
So higher rates may mean that multifamily investors will need to put more equity into their deals to make the numbers work. This means less leverage and a bit lower returns. But It also means less risk for you in your deal, which is why I was recommending this in my prior video several months ago even though rates were much lower at that time.
With a lower loan amount and a bit more equity in your deal, returns are reduced a bit, but still attractive (especially compared to the stock market right now), so with rents at all time highs and with all indications still pushing higher, these deals still are in big demand!
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