I recently did a podcast interview and one of the questions was about different interest rates. I do not think I answered the question that well, but it did give me an idea for a blog post.
There are really 3 interest rates that I think anyone interested in multifamily investing should follow.
10-Year Treasury — Agency Loans
One of the most important rates to follow is the 10-Year U.S. Treasury Note sometimes referred to just as the 10-Year. Fannie Mae and Freddie Mac use the 10-Year to determine the interest rate you get on their 10-year multifamily loan product.
The 10-Year U.S. Treasury Note is a debt obligation issued by the U.S. Department of the Treasury, with a maturity of 10 years. It is a marketable security, meaning it can be bought and sold in financial markets.
The interest rate on the 10-Year U.S. Treasury Note is determined at auction, where it is sold to investors. The 10-Year U.S. Treasury Note is considered a benchmark for long-term interest rates. The yield is closely watched as an indicator of the direction of the economy and monetary policy.
Fannie Mae uses the 10-Year U.S. Treasury Note as a benchmark for setting the interest rates on its mortgage-backed securities (MBS). By using the 10-Year U.S. Treasury Note as a benchmark, Fannie Mae can help ensure that the interest rates on its MBS are competitive.
A good rule of thumb is to add 2% to the current 10-Year and that is a close approximation of what you could expect when receiving a loan quote from them.
Like Fannie Mae, Freddie Mac also uses the 10-Year U.S. Treasury Note as a benchmark for setting the interest rates on its mortgage-backed securities. This means you can add 2% to the 10-Year to determine a Freddie Mac interest rate as well.
SOFR — Bridge Loans
SOFR, or the secured overnight financing rate, is a benchmark interest rate published by the Federal Reserve Bank of New York. It is based on the rates at which banks lend to one another overnight using U.S. Treasury securities as collateral.
It is designed to be a more robust and reliable benchmark than its predecessor, the London Interbank Offered Rate (LIBOR). SOFR is based on a large and transparent market, which makes it less susceptible to manipulation than LIBOR.
As the U.S. transitions away from LIBOR it will rely more on SOFR for floating rate debt. This is important for multifamily investors because floating rate bridge loans will be based primarily on this index.
The standard bridge loan in multifamily has a 3 year plus 2 one-year extensions and is typically a floating rate. The spread or fixed portion of the loan can range from 2% to 5% or more depending on the quality of the asset. Then the floating portion of the loan is the SOFR index.
So, if your spread is 400 basis points or 4% over SOFR then your all-in-effective rate is 4% + SOFR. As of December 15th, 2022 SOFR is 4.32%. So, your interest rate on your loan would be 4% + 4.32% which equals 8.32%.
If you buy an interest rate cap, which most lenders require now, then you can cap SOFR at a strike price and the cap provider will send interest payments in the amount that SOFR exceeds your strike.
Prime Rate – Bank Loans
Banks often use the prime rate when issuing multifamily loans. The prime rate is a benchmark interest rate used by the banks to set the rates on various types of loans and lines of credit, including multifamily lending.
It is based on the federal funds rate, which is the rate at which banks lend to one another overnight and is typically set at a fixed margin above the federal funds rate. As of December 15, 2022, the prime rate is 7.50%.
The prime rate is determined by each individual bank, based on the rate it charges its most creditworthy customers. This means if you have a great long-term relationship with a bank, they will give you a 7.50% interest rate loan.
If you do not have a relationship with the bank, they might add an additional point or 1% to the loan. If you are looking for a recourse bank loan then the prime rate is a good benchmark for a new loan.
Conclusion
Interest rates can get confusing. If you want to simplify your investing journey then tracking the 10-year, SOFR, and Prime will give you a good idea of what interest rate you can get. Adding 2% to the 10-Year will ballpark your agency loan interest rate. Tracking SOFR will determine the floating portion of a bridge loan. And following the prime rate will give you a good idea of what interest rate you could expect from a recourse bank loan.
A good site to track these rates is Chatham Financial.
