What Should You Do When Interest Rises?

“Don’t wait to buy real estate. Buy real estate and wait.” – Will Rodgers

I was speaking to a colleague the other day about interest rates and multi-unit values. Like me, he has been selling apartment properties since the late 1970s. He mentioned that we have seen some crazy interest rates on multi-family properties, especially during the 1980s, and yet we have experienced record appreciation, sometimes during the times of the highest interest rates. My reaction was that everyone has to live somewhere, whether it is an apartment or a home. No one has to have a business location, an office, a storefront, or an industrial property, but you do have to live somewhere. He sent me a rate sheet from 1981.

TICOR
The title company used to circulate a list of 15 or so of the most popular mainstream lenders at the time (B of A, Home Savings, Cal Fed, etc. along with their current rates.) It is also interesting to note that most of these lenders no longer exist or have been taken over by even larger banks.

WHAT IS THE UPSIDE?
My friend also did a chart showing the rise in cost per square foot of multi-unit buildings during a 10-year period. It went from 18 dollars per square foot in 1972 to 86 dollars per square foot in 1982. No interest rate jump could offset that! We have seen that during periods of higher interest rates, new construction is adversely affected. Less construction project starts, equal fewer available rental units. Although there is no question that we are in need of many more rental units, the scarcity creates additional value for existing units. With an already low vacancy rate, this makes for more competition for available units and ultimately higher rents, as well as reduced turnover. Higher interest rates could also reduce competition for your upleg if you are in a 1031 exchange.

WHAT IS THE DOWNSIDE?
If you are a builder, it may reduce your profit or cause you to have to put more cash into each project, because of a reduced loan amount and a higher interest rate. If you are refinancing, your building may not qualify for the loan amount you wanted, thus hindering your ability to expand into other properties. As an apartment owner, it may also reduce your projected cash flow after a refinance, because the borrowed money is more expensive.

SHOULD I WAIT TO SELL?
This could be the best time to sell. Reduced competition from other similar properties could cause you to end up with a better price or at least easier negotiations and hopefully fewer seller concessions. The question is “Why are you selling?” If you are wanting to expand or are ready to downsize or retire, there is no guarantee of a better market by waiting. A change in the market may or may not improve your position. Why take a chance?

“Life is about timing.” Carl Lewis

What we at PRS PROPERTIES CAN DO. We can discuss with you the current rents in your area and supply you with comparable rental prices for similar properties. Before you hire a manager, make sure the compensation is fair to you! We can also look at your building for changes that might allow you to get a higher value in order to create value without huge expenses for your building. We can help you to get the maximum value for your property, should you decide to sell, or the maximum return if you are planning to keep your building.

We always have many investors who are looking for “as-is” properties and are willing to purchase with low rents, a moratorium, or even with a problem tenant in place. We have put together numerous transactions over the years which involve properties that are not listed for sale. Many investors are in 1031 exchanges and need to identify a replacement property before their 45-day identification period runs out.

Should you decide to put your property on the market, we will put together an aggressive, targeted, and professional campaign to get your property sold fast. We have been doing this for over 40 years, and we will use all the tools available to bring you the most dollars at closing. If you are thinking of selling or are just curious about the value of your property, don’t hesitate to give us a call.

Remember – KNOWLEDGE IS POWER!