How to Keep Multifamily Investments Moving Despite Rising Interest Rates

The commercial real estate sector had a jolt when the Federal Reserve increased interest rates by 75 basis points in June and again 75 basis points in July. Fortunately, there are ways around and fixes for these possible obstacles. Investors in the five to 150 unit small balance lending (SBL) segment of the multifamily housing market have a number of choices to accomplish their goals of financing multifamily portfolios. View the timeline above in larger resolution by clicking here.

A recent webinar entitled “Financing Amid Rising Rates: Best Approaches for $1M-$15M Multifamily Loans” featured market professionals from Walker & Dunlop who discussed how to successfully navigate the current financing environment. Tim Cotter, director of capital markets, Allison Herrera, senior director of SBL, and Allison Williams, senior vice president and chief production officer, made up the expert panel.

In a range of finance contexts, these seasoned experts have discovered strategies to close agreements and have shared their insights and advice. The following advice will assist you in navigating the current financial landscape and gaining momentum if you are an owner of five to 150 unit properties in need of loans ranging from $1 million to $15 million.

Step 1: Take into Account All Available Capital Sources
Walker & Dunlop asked viewers about their current sources of capital during the webcast. With 70% of respondents saying they had recently worked with a bank or credit union, bank and credit union funding was the most common.This source of funding is appropriate for a variety of uses, including conventional and construction financing that cannot be covered by interest-bearing debt. However, taking out a loan from one of these highly regulated institutions may have certain drawbacks, including recourse for all or part of the loan, tougher underwriting standards, and possibly limited capital availability in the coming months.

Due to these factors, buyers in the multifamily market’s $1 million–$15 million segment should look outside of banks and credit unions for their financing options. The Department of Housing and Urban Development (HUD), life insurance companies, Freddie Mac and Fannie Mae, as well as commercial mortgage-backed securities, make up the whole spectrum of funding sources (CMBS).

Here is a quick summary:

Agency finance: The US government founded Fannie Mae and Freddie Mac with the goal of financing affordable homes in both good and bad economic times. Their programs are less susceptible to market volatility as a result.

If you are aware with the nuances and requirements of the program, agency financing can be executed more quickly because it is non-recourse, which gives it an advantage over many bank options.

Additional benefits for multifamily SBL borrowers include:

80% maximum loan-to-value (LTV)
a low ratio of debt service to total debt (DSCR)
Early interest rate locks and interest rate holds
a more accommodating pre-payment framework with cash-out options than other government funding packages
HUD financing: This option may be appropriate for SBL borrowers who have the time and resources for a more drawn-out execution procedure as well as for comprehensive reporting and documentation following closure. HUD programs are renowned for offering competitive borrowing rates and leverage that can be greater than that provided by Freddie Mac and Fannie Mae. Longer terms, up to 30 years, complete amortization, and a reduced debt service coverage ratio are all options for borrowers.

HUD offers programs available for development as well as financing market-rate homes as well as affordable and rent-restricted housing.

Don’t let your thoughts be constrained by the idea that life insurance firms only invest in low-leverage, institutional-quality deals involving fully leased properties in significant metropolitan centers. There are options for loans of different sizes, ranging from $1 million to $15 million, and some life companies are willing to finance older assets that require renovations. Additionally, life insurance firms provide many of the benefits of agency financing, including non-recourse terms and relatively quicker and more efficient execution.

CMBS: Despite being frequently seen as “financing of last resort” and with spreads now expanding, CMBS can be an excellent choice for:

Deals that don’t mesh well with agencies or life firms
Sponsor with a negative credit history
A contract having a distinctive quality
The last thing to keep in mind is that not all financing needs to be long-term or permanent. Bridge loans with terms of 2 to 5 years are an excellent choice for:

Objects that need further stabilization
After-purchase property rehabilitation
Purchasing a house that hasn’t been stabilized because of a recent occurrence, such as damage to some of the units
Changing to a permanent loan transaction, a refinance, or a sale
These loans frequently feature fluctuating interest rates, but they may also include a ceiling on those rates for your safety. For additional loan funds for uses like rehab work, such loans might be underwritten to pro forma operating income, which is the predicted cash flow once the property is stabilized and occupied versus where it is now.

Step 2: Control What You Can

There are several factors that an SBL borrower can influence as long as interest rate volatility persists, despite the fact that you cannot control inflation, the Fed, or geopolitical events.

You should start with your current portfolio. Have you got a loan with a pre-payment penalty or one that you weren’t quite ready to restructure a few years ago? It could be wise to go over these scenarios once more and look into refinancing possibilities.

Look at your net operating income to acquire the best leverage and highest LTV:

Are your operating costs as minimal as possible?
Can you cut any fees that aren’t necessary?
Are you performing maintenance in the most efficient manner possible?
Finally, organize your paperwork. Having the required documentation on hand expedites the process because you want to lock in an interest rate as soon as feasible.

Think about cap rates at every stage. These are still still moving independently from the Treasury rate and at historic lows. However, the strong rent growth of today is probably going to change things. Continued rent growth will influence cap rates because it will contribute one of the biggest increases to operational revenue. As a result, you could conclude a loan at a cap rate that is far lower now than it would be at year’s end.

As a result,
Work with an expert on your future steps, whatever they may be. They’ll have an up-to-date understanding of who is financing in the $1 million to $15 million range, how much they are loan, and under what terms and conditions as the market changes. You can download the Walker & Dunlop financing guide to learn more about your possibilities.There is never a bad time to begin. An experienced partner can monitor the market, assess potential lenders, and even assist you in locking in a rate early that is based on your cash flow or anticipated stabilization even if your property is just in the planning stages.

You can be sure that your multifamily ambitions won’t need to be put on hold by having a complete understanding of your funding alternatives, taking preemptive measures, and receiving expert advice. Regardless of what happens with interest rates in the next months, a professional will be able to ensure that 2022 is a year of progress rather than pauses.