Investors are just coming out of their state of shock over the recent jump in rates, so lets take a look at how the new reality affects multi family investments.

Just a couple months ago (before rates jumped up) I did a video about your lender’s perspective on risk in multi family investments and another where I go into detail on your lender’s view of LTC & LTV.

Here are links for these:

https://youtu.be/Tmr6l4acJmA

https://youtu.be/lap9Jy0-KCY

The way for investors to control risk is through using less leverage which means a lower LTC/LTV.

Now that rates have gone up considerably, we see this playing out in the market in 2 ways.

First, the good news (for landlords, not for tenants):

Rents are at all time highs and all indications are that they will continue to rise.

So with rents at highs and going higher, it’s still a great time to invest in multi-family, but here’s where we run into trouble.

With higher rates, debt service (mortgage payments) will be higher and this will reduce (or even wipe out) cash flow.

Given a fixed amount of rent income and expenses, the only variable that can reduce mortgage payments is a lower loan amount.

There are only two ways to achieve a lower loan amount. One would be a lower purchase price and the other is a lower LTC/LTV which means the investor needs to put more equity into the deal.

Demand for multifamily properties has been very strong which has kept prices high and pushed cap rates to historically low levels.

We are starting to see some pressure in certain markets, but overall, sale prices have remained strong.

In order to make cash flow and risk profile numbers work, lenders are beginning to offer smaller loans (Lower LTC/LTV). Some lenders who were lending 75% LTC or 70% LTC may now be willing to lend only 65% or 60%.

This means that Investors need to put up more equity and use a bit less leverage in their investments.

Because many smaller investors are a bit less flush with cash now that their stock market positions have dropped, they will naturally be less willing and able to do that, which we’d expect would mean less buyers in the market and eventually lower prices for multifamily properties. But with rents at all time highs and pushing higher demand is still very strong, so a drop in prices may never materialize.

The bottom line is that if you are in a position to invest, it’s a great time to do it.

Using a little less leverage may lower your returns slightly, but returns are still very attractive and you have less risk!

Commercial mortgages are always adjustable anyway, so it makes less difference in the long term than with a 30 year fixed residential mortgage.

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Several months ago before rates jumped higher, I did a video (link below) talking about controlling risk where I discuss the concepts of “Loan to Cost” vs “Loan to Value”.

https://youtu.be/Tmr6l4acJmA

https://youtu.be/lap9Jy0-KCY

With today’s higher rates and prices not really dropping (yet), lenders are improving the risk profile and viability of their deals by reducing loan amounts.

For example, if a lender was willing to lend 75% of value on a multi family acquisition loan before, they may now only be willing to lend say 65%.

This makes sense since rates have gone up substantially, the smaller loan amount may have a payment similar to the payment for larger loan amount at lower rates.

Assuming the same rental income numbers, if the mortgage payments and expenses are still the same, the cash flow from the deal would be the same.

The only other way to keep cash flow in an ecceptable range would be to lower the loan amount by lowering the sale price of the property.

In most markets, there has been so much demand that we just haven’t seen prices dropping.

So higher rates may mean that multifamily investors will need to put more equity into their deals to make the numbers work. This means less leverage and a bit lower returns. But It also means less risk for you in your deal, which is why I was recommending this in my prior video several months ago even though rates were much lower at that time.

With a lower loan amount and a bit more equity in your deal, returns are reduced a bit, but still attractive (especially compared to the stock market right now), so with rents at all time highs and with all indications still pushing higher, these deals still are in big demand!

✅ Get New Book on Amazon: Don’t Buy Multi-Family! BUILD IT https://www.amazon.com/gp/product/B09PSFMC6Z/

✅ Amazon Author Page: https://www.amazon.com/author/rogerluri

✅ Download FREE BOOK: http://ld2development.com/comm-mf-mixed/ _________________________

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There are a lot of great neighborhoods in Chicago where people want to live in new construction and builders are putting up small condo and rental projects to meet the demand.

So why build in Lincoln Park?

Most of these other areas have lower land prices which allows building more affordably priced units.

When you look at building a standard 3 or 6 unit building on a standard single or double lot, regardless of neighborhood, the buildings are very similar.

The size limit is determined by the zoning district, so allowances are the same accross neighborhoods. Generally builders want to build as much as is allowed in order to maximize returns. But if you look at total returns for condo sales, they vary substantially.

For example, a condo project for 3 unit building on a standard lot in NorthLincoln Square/Bowmanville might have total sales of about $1.7M.

A very similar 3 unit building In the East Village area might fetch $2M to $2.1M in total sales.

In Lincoln Park, for a similar building, the units might achieve total sales of close to $3M.

Now of course land prices are higher in the more expensive areas and construction costs will also be higher for the more expensive units because they need to have upgraded finishes, but still, the higher sales numbers far out weigh the extra costs, so margins are considerably higher for the more expensive neighborhoods.

Another consideration is that buyers in these Class A locations like Lincoln Park are more affluent and are less affected by economic factors like inflation, etc.

When they want to live somewhere they have the capital to buy or rent there regardless of market conditions.

If the real estate market experiences a glitch and values begin to drop, we see that Class A locations/ projects generally tend to hold their value best and are first to recover.

From my years serving as a Bank director and on the loan committee looking at many construction loans, I’ve seen first hand that higher end projects in the best locations always tend to weather market turbulence much better.

✅ Download FREE BOOK:

Don’t Buy Multi-Family! BUILD IT

LD2development.com/

✅ Order New Book on Amazon:

Don’t Buy Multi-Family! BUILD IT https://www.amazon.com/gp/product/B09PSFMC6Z/

✅ Amazon Author Page: https://www.amazon.com/author/rogerluri 

_________________________

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