As I write this blog, the 10-year treasury rate is 3.61% meaning the interest rates for a fixed 10-year loan are in the mid 5% range depending on location, size, quality, and leverage.
Although I can’t predict the future, there’s a good chance that interest rates climb again and as the Fed works to get inflation under control. This is why I’m believe all owners should manage their risk and be defensive with their existing portfolios.
Looking at multifamily and self storage specifically, early indications show early signs of leasing levels that are down below normal seasonally adjusted numbers, which is putting pressure on landlords to lower rental rates or accept higher vacancy at their properties. Both the apartment sector and self storage sector has had an incredible run for many years, but now that rent appears to be going down, it would be an excellent time to capitalize on peak net operating income (NOI). Falling NOI can have multiplying effects especially if cap rates are also rising. Lenders often look at the most recent leased unit to mark the market rates, if your last rented unit is below others on your rent roll you could risk lenders discounting your in place gross income. This will affect a lender’s debt coverage ratio and the loan to value and could have a significant effect if there’s a deep downturn.
For example, if you own a property with a $1,000,00 NOI, it would have been valued at a 4% cap rate in early 2022 or $25,000,000, if it has a $11,500,000 loan it would be a 46% loan to value ratio and 1.61 debt coverage. A very conservative loan by all measures.
If NOI decrease by 10% between now and your refinance date while incorporating today’s market rates then you would be below the required Debt Service Coverage ratio of 1.25 or in some cases 1.20 and have a cash IN loan. Per the example below.
It is amazing how quickly the tables can turn. The updated 2023 potential scenario would cause the borrower do bring in cash to close the loan to get the DSCR above 1.20 and could be testing the upper limits of the lender’s acceptable loan to value.
If you have a portfolio of multiples properties and you are sitting and waiting to see what happens later in 2023 you should reconsider. On a historical basis, rates today are still lower than they have been in the past. Locking in a fixed-rate loan now could protect your portfolio and cash and enable you to continue investing in the next few years. In this current unstable market with many variables to control, locking in your refinance early could create stability in one area of your portfolio which will allow you to focus on other things.