Flexibility in Financing

Posted By: Neil Shea ICOR Blog & News,

With the latest unemployment and CPI numbers published in October, the market is certain of one thing and that is the Fed will be gracing us with more rate hikes at least through the end of 2022. So in this high-rate environment, how do real estate investors instill certainty into their investment strategy when it comes to financing that next deal?

Answering that question might be akin to having a crystal ball.  Most real estate professionals believe this rate environment is temporary and sooner or later, rates will be coming back down to reasonable levels. It’s a question of when.

Rather than trying to time the next pullback in rates or coughing up massive rate buy-down fees at your next loan closing, perhaps the thing investors need to consider is flexibility when it comes to their loan terms. When rates come down and the opportunity to refinance into a loan you want to keep for more than just a few years presents itself, what will be the cost of refinancing your current loan? Before you secure a loan on your next deal, ask yourself and your lender the following questions:

  • What is my pre-payment penalty? Do I have options to shorten it?
  • What shorter-term loan products are available?
  • Should I consider an interest only loan? Maybe, based on these questions:
    • How long am I planning on holding the property?
    • Is paying down the loan balance over the next few years more important than having better monthly cash cashflow? Or should I put down more money now and have better cash flow over the next few years.

Today, many investors are falling victim to the “deer in headlights” syndrome due to high interest rates and uncertainty about the overall market. Most national real estate data tracking companies have forecasted a flattening of home prices or very modest appreciation in most markets over the next couple of years. If anything, the higher rates and flattening of prices are going to create more opportunities for investors to find new deals and negotiate better terms. Don’t miss out on those opportunities, rather, afford yourself flexibility when financing your next deal.