Lender411.com Articles Commercial Mortgage

Link to this page Print RSS  

If you have adjustable rate loans on your investment properties, this may be a good time to refinance them with fixed rate loans. Most commercial and apartment loans start out with short-term fixed rates (3-10 years) and then automatically convert to adjustable rate loans after the fixed rate period expires. A number of investors are on adjustable rates currently and have little motivation to refi into fixed rates because their current rate is attractive. This may be a bad idea.

I analyzed two scenarios: One for a typical commercial income property loan, and one for a typical apartment loan. Both assume that the existing interest rate on the adjustable is 6.25%. Not a bad rate. Now if rates rise and the interest rate increases just 1% to 7.25%: the cash flow of the commercial property loan decreases 43%, and the cash flow of the apartment property decreases over 70%! Contact me and I'll send you a copy of the spreadsheet detailing this analysis.

I often hear investors say that they don't worry about interest rates increasing because the threat of a recession will force the feds to keep rates low, or it is an election year, or whatever. The bottom line is this: you cannot predict interest rates. Sure, rates may stay low for a couple more years, but are you willing to bet your cash flow on it?

Keith Phillips heads the commercial real estate financing department of Covenant Mortgage located is San Juan Capistrano. Please contact Keith if you have any questions about this article.

Link to this page Print RSS