Right now, we’re going to talk about interest rates and lending. Thanks for checking out the Real Estate Today Podcast.
I’m Bob Nelson, Real Estate Investment Broker with Pacwest Real Estate Investments. Joining me today is René Nelson. René is a commercial real estate broker, very accomplished, esteemed, and the owner of Pacwest Commercial Real Estate in Eugene. René , thank you for joining me.
René Nelson: Thanks, Bob. You know I have a past lending background, so let’s talk with your listeners about what you’re going to see with increasing interest rates. How does that impact real estate, and as an investor, how do I protect myself?
Bob Nelson: Well, first of all, as interest rates increase, that’s something that you or I cannot control. An investor cannot control that. Actually, if they were to attempt to control that, they would’ve made a better decision as they were taking out the loan to begin with. They would’ve gone with a fixed interest rate for the period of time that they anticipated owning the property. Regardless of the cost of that fixed interest rate, all of a sudden, it becomes very attractive as everything else goes up.
René Nelson: Let’s also talk about people that want to go out and buy right now in this market. How do you test from a sensitivity level how to track a property on the cash flows and how potential increasing interest rates may affect cash flow of a property?
Bob Nelson: Well, first of all, again, did I take out a loan that is a fixed interest rate, one that will remain constant for a period of time? With a commercial loan, it’s not too, too uncommon to see the interest rate fixed for, say, five years. That’s what the lenders have been doing here recently. I was able to get fixed for 10 years eight months ago. However, as the lenders anticipate an increase in interest rate, they also adjust their parameters of their loans to make sure that they’re not holding the bag if interest rates take off and they have a loan that’s outstanding at a lower level.
René Nelson: One thing that I’m starting to see also, in the past a lot of investors have wanted to use maximum leverage, so they try to come in with 20, 25% down. Now I’m starting to see lenders say, “Eh, you need a little more money. Let’s figure 30% down.”
Bob Nelson: Right. That’s absolutely being seen. As that happens, when you have a certain amount of cash and you’re anticipating an acquisition, do understand that if you have to make a 30% down payment plus probably about another 1 to 1.5% cost, you’re going to have to scale down your vision.
René Nelson: Absolutely. Buy less units, be safe.
Bob Nelson: I’m Bob Nelson, Real Estate Investment Broker with Pacwest Real Estate Investments.
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