Interest rates are going to go up.
As real estate investors it’s important to be prepared.
In this video, you will know some tips to help you prepare.
Transcripts:
Chris Bounds 00:00
The FED may come out where over the next two years could be seen six to seven rate hikes. What If that happens? That’s one thing. I think most the consensus is it will to some degree. Then, you know how big those rate hikes are? We don’t know. But how are you positioning? Neither one of you pick this up? How are you all navigating the underwriting process? With that in mind, and maybe part of it, are you taking a little bit more cautious approach on bridge debt versus going in with agency straight up on the acquisition or what are y’all doing on the acquisition side?
Cody Laughlin 00:44
It’s a great question. It’s a great conversation to it’s very relevant, obviously, I think it’s on everybody’s mind right now. If you look at the transaction volume from last year, most of your acquisition of volume was done on floating rate, bridge debt. That’s what our latest acquisition is. Going into a position like that, where we are expecting rate increases over the next 12 / 24 months. Buying purchasing rate caps on your, your floating rate bridge is going to be critical, your lenders are going to require it anyway. But just finding the right rate cap that’s suited to your business needs.
What we do is like, for example, we buy a two year rate cap at a 200 basis, point spread. Then we model that in our underwriting to see if we hit that cap, can our performance projections, cover that spread and cover that higher interest? If it can and we feel comfortable with that, and then we move forward. I think right now, right, as we’re going into this, you know, rate hike environment is probably a very good time to start securing more long term fixed rate debt, you could still lock in a very low attractive interest rate and while rates, do whatever they’re going to do over the next 12 to 24 months, whatever volatility we see. I think now would be the best time to get into a fixed rate environment.
So moving forward into this year, the assets that we’re currently pursuing that’s going to be our strategy is looking into locking that that. Low fixed rate debt. But here’s what’s interesting. I think the FED is in a very, very difficult position right now. Because if you ask my opinion, I think that the FED moved from a very hot or very accommodative position on rates to a very hawkish position very quickly. And that’s never really happened before. I think that’s probably because a lot of political influence, you know, the Biden administration is getting a lot of heat for their, call it mishandling of inflation.
I think there’s a lot of political pressure that’s now forcing the Feds hand into hacked more aggressively. But the problem with this is, it’s on a very teetering slope, where if they go too aggressive, and they push too many hikes, or hikes that are too aggressive, it could very rapidly put us right back into a recession type of environment. We’re starting this revolving cycle all over again, where rates are going to drop, and then quantitative easing gets coming back. I think, to your point, it’s going to be very interesting to see if we’ll actually achieve five, six great heights over the next 1224 months, nobody really knows.
But I think the most important thing for anybody right now that’s listening, is keep a very open line of communication with your lenders. You know, keep having ongoing conversations keep up to date on what the Fed is doing, where rates are falling, and have those conversations I would even encourage probably on a weekly bi-weekly basis, with your lenders just to make sure that you’re keeping your finger on the pulse. In highlighting what you said, is capping the downside, which you’re talking about capping you’re capping the rate increase your ceiling on that, that ultimately the biggest and best investors in the world that that was the that’s always their number one job.
And if you go read, like Ray Dalio stuff you read Steve Schwarzman or Warren Buffett, it’s always managing risk. Yeah, and the other thing too, that Chris Do it is the other thing that we do, and this is every deal, whether it be fixed rate or bridge is we also build in a lot of reserves to for the wetness. So we have working capital reserves, we have deferred maintenance reserves, you know, we have other reserves that are set aside to kind of be well capitalized for that just in case, right you can try to what if your do all day long, but the point is, is we do what we can with the lenders, we do what’s required, but then we go above and beyond that, and kind of really position ourselves as far as our capital stack to make sure that we have extra reserves for the whatever and I think that’s just another layer of use, like you said, mitigating that downside.