Federal Reserve Bank of St. Louis President James Bullard said Thursday he is considering support for another large rate rise at the central bank’s policy meeting next month and added he isn’t ready to say the economy has seen the worst of the inflation surge.
-Wall Street Journal
With another looming rate hike comes more pain for floating rate debt. Borrowers are seeing cash flow get chewed up by an increase in debt service and interest rate cap escrows.
The multifamily owners that bought a tight rate cap last year are clear for now. But is it too early to refinance?
Multifamily Market
Right now, is a difficult time to sell. Bridge loan leverage is dropping. Interest rates are rising. Investors are happy if you buy a $20MM deal, put $4MM down, and double their money by increasing the asset value to $24MM.
I am oversimplifying, but now that same $20MM deal you must raise $7MM for a down payment. This does not include closing costs and reserves. And the interest rate is almost double. Is it any wonder why price is starting to give?
As bridge debt starts to disappear, agency debt is starting to reappear. Buyers are now looking to buy based on in place cash flow instead of pro forma cash flow.
Read More: How Bridge Lenders Inflated the Multifamily Market
Agency Debt
Fannie Mae fixed rate loans quotes are coming in below 5%. This is great news! For the time being, you can refinance out of an expensive bridge loan and into a low, fixed rate permanent loan.
If you refinance now with a good interest rate, there is much less pressure. You do not have to worry about not being able to refinance or sell next year or the year after. At some point you will be able to sell for a profit before the 7- or 10-year loan term is up.
It might be a good idea to look at your refinance options now. If the 10-year treasury starts moving up, then the agency fixed rate will move up. Waiting until the last minute for refinancing is stressful. The options might not be great.
Cap rates are moving up and that can mean your increase in NOI might not increase your value from where you purchased. Instead of selling you might need to hold longer. A refinance with a lower rate today might be a good strategy.
Conclusion
It does not hurt to look at your refinance options. It is not fun to be on a call when your loan is coming due, and you do not have any good options. Agency debt is sizing below 5% and is long term. You can also get floating agency debt where at least it is long term, and the spread is lower.
Read More: Is This the Best Loan Option for Multifamily?
