Interest Rate Increases and its impact on Apartment Investing.

Maricela Soberanes Tuesday June 21st, 2022

You might have heard of the outrageous Interest Rate Hike, a 75bps!

Several of our investors asked us how that impacts ongoing Multifamily Investments opportunities?

https://up-plex.com

Hello Up Plex family,

Last week, the Fed announced a rate hike of three-quarters of a percentage point; it was the highest one-time increase in 28 years. What is the impact of that news on an investor like you and us?

The short answer is that when you invest with our team, we incorporate situations like this into our conservative underwriting. Additionally, we integrate safeguards into the business plan to mitigate the impact of interest rate increases. Also, depending on the type of loan, we can buy insurance to protect ourselves from such increases.  

The most important thing is not to be alarmed by blanket statements from others (“increase in interest rates will affect real estate investing”). 

Whether you are invested with other syndicator sponsors or us, we want to break down the concept and give you a list of questions you should be asking when evaluating an investment opportunity now and in the future…

Because an informed investor, is a confident investor! 

Ask your sponsorship team:

1- What type of loan are we using? 

2- What are the terms of the loan?

3- Did you purchase a Rate Cap (if floating or variable rate)? For what length of time? 

Interest rate increases only have the potential to impact floating-rate debt. Therefore, properties with fixed-rate debt are not affected by rate changes. 

As for properties purchased with floating-rate debt, here is a list of financial safeguards we incorporate in the business plan to mitigate the impact of interest rate spikes: 

1. For each floating rate loan, we purchased an Interest Rate Cap. An Interest Rate Cap puts a ceiling on how much the floating rate index can increase on loans. This essentially acts as an insurance policy/contract on floating rates. 

As interest rates increase, the monthly mortgage payment increases accordingly until it hits the Interest Rate Cap purchased to protect the investment’s cash flow.

2. If the market’s floating rate index exceeds the Interest Rate Cap, the insurance (Cap provider) will kick in and pay the excess difference on loan payments. 

We model or plan for the worst economic case scenario within our underwriting tool. We budget reserves and plan the business plan around the potential higher interest rate – up to the cap amount. 

Example: for a loan with an initial floating rate of SOFR (index) @0.5% plus a 2.0% spread, we would purchase a 2% interest rate cap (this would kick in at 4.5% for the above example. The Cap Provider would pay the excess increase above the Interest Rate Cap. 

As you can tell, the type of loan, the amount of Interest Cap Rate, and the amount of reserves all play an essential part when determining the impact of the investment.  

My key takeaway: While the increasing and volatile interest rates are creating new challenges, the conditions also create a great opportunity for strong operators to acquire new properties. 

Do your due diligence and get a rockstar team; it is still a great time to invest in multifamily real estate.

We are here to help. If you have more questions and would like to discuss this further, please reach out to invest@up-plex.com with your questions or schedule a call.

 

Thank you for reading the Up Plex Multifamily Investments blog!

 

Sincerely,

Chris Linger & Maricela Soberanes

Co-Founders, Up Plex Multifamily Investments

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