Investors are just coming out of their state of shock over the recent jump in rates, so lets take a look at how the new reality affects multi family investments.
Just a couple months ago (before rates jumped up) I did a video about your lender’s perspective on risk in multi family investments and another where I go into detail on your lender’s view of LTC & LTV.
The way for investors to control risk is through using less leverage which means a lower LTC/LTV.
Now that rates have gone up considerably, we see this playing out in the market in 2 ways.
First, the good news (for landlords, not for tenants):
Rents are at all time highs and all indications are that they will continue to rise.
So with rents at highs and going higher, it’s still a great time to invest in multi-family, but here’s where we run into trouble.
With higher rates, debt service (mortgage payments) will be higher and this will reduce (or even wipe out) cash flow.
Given a fixed amount of rent income and expenses, the only variable that can reduce mortgage payments is a lower loan amount.
There are only two ways to achieve a lower loan amount. One would be a lower purchase price and the other is a lower LTC/LTV which means the investor needs to put more equity into the deal.
Demand for multifamily properties has been very strong which has kept prices high and pushed cap rates to historically low levels.
We are starting to see some pressure in certain markets, but overall, sale prices have remained strong.
In order to make cash flow and risk profile numbers work, lenders are beginning to offer smaller loans (Lower LTC/LTV). Some lenders who were lending 75% LTC or 70% LTC may now be willing to lend only 65% or 60%.
This means that Investors need to put up more equity and use a bit less leverage in their investments.
Because many smaller investors are a bit less flush with cash now that their stock market positions have dropped, they will naturally be less willing and able to do that, which we’d expect would mean less buyers in the market and eventually lower prices for multifamily properties. But with rents at all time highs and pushing higher demand is still very strong, so a drop in prices may never materialize.
The bottom line is that if you are in a position to invest, it’s a great time to do it.
Using a little less leverage may lower your returns slightly, but returns are still very attractive and you have less risk!
Commercial mortgages are always adjustable anyway, so it makes less difference in the long term than with a 30 year fixed residential mortgage.
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