Multifamily Minute Reader Reflections: Where Will Interest Rates Go?
We surveyed our 40,000 subscribers to get a feeling for the Fed's latest move.Better Financing Starts with More Options$1.2M offered by a Bank at 6.0%$2M offered by an Agency at 5.6%$1M offered by a Credit Union at 5.1%Click Here to Get Quotes
In our Jan. 31 Multifamily Minute email, we wanted to get a feel for how apartment investors thought the latest Fed meeting was going to end. Most analysts had been saying for weeks that another increase was coming, but no one knew with certainty how much rates would increase.
Unlike most of the surveys we run, this one has a straighforward, accurate answer. The day after the newsletter went out, the Fed announced its 25-basis-point increase, putting the federal funds rate up to a range of 4.50% to 4.75%.
Still, check the table below for the results.
Percent of Respondents
Increase (75 basis points)
Increase (50 basis points)
Increase (25 basis points)
Decrease (by any amount)
As you can see, an overwhelming number of our readers anticipated the increase, even if about 40% of respondents thought it would be a bit higher of a jump.
What Does the Increase Mean for Me?
It really depends, but it's certainly not all doom and gloom.
For example, a Freddie Mac multifamily loan is cheaper now than it's been in months. The agency is offering an extra 12 months of interest-only payments, not to mention a 40-basis-point rate reduction for the month of February.
That said, if you've got a loan right now that has a floating interest rate, things may look a little rough as we move through the year. Rates are undoubtedly going to keep rising by at least a bit more, so unless you're already at your rate cap, expect your debt costs to climb a bit more.
Unless, of course, you lock in a fixed-rate loan. Just be sure that you understand the prepayment penalties of any new loan you get. Once rates start to drop (maybe next year?), you may be tempted to refinance — so make sure you get a loan that doesn't make that prohibitively expensive.
Sign Up for the Multifamily Minute
Feeling left out, because we didn't ask you about your thoughts on the Fed's latest increase? Hop on our mailing list to get the Multifamily Minute every Tuesday. We'll shoot you our latest content from the Janover network as well as the week's survey.
Our Previous Survey
In case you missed it, last week's survey was focused on marketing multifamily units. With vacancy set to increase in most markets this year, it's key to adopt a winning strategy. Check out our analysis.
What are the current trends in multifamily financing?
According to Freddie Mac®’s predictions, multifamily origination volume is estimated to expand to $317 billion in 2019, a nearly 4% increase from the approximate $305 billion of multifamily financing originated in 2018. Factors that can be attributed to this trend include consistent investor demand for apartment properties, as well as other market forces, including a strong economy, reasonable job growth, and low interest rates.
It's unsurprising that the majority of respondents — more than 60% — pointed to rising interest rates. After all, the current federal funds rate of 4.25% to 4.5% is in stark contrast to the same time last year, when rates ranged between 0.0% and 0.25%.
Tighter underwriting standards are also a factor, which involves the standards lenders set for debt service coverage ratios, loan-to-value ratios, and more.
What are the benefits of multifamily financing?
The benefits of multifamily financing include better interest rates, longer terms, flexible terms, and higher leverage.
Due to lower risk in the multifamily property sector, loans typically come with lower interest rates than similarly valued properties in other commercial real estate sectors. Banks consider it a less risky investment. Although many multifamily loans are limited to between five and 10 years, some financing types, like HUD loans, offer fully amortizing, long-term options. Due to the wide range of options available, borrowers can often find the terms they’re looking for by shopping around. Multifamily financing typically allows for higher LTV ratios than loans for other commercial real estate assets, like office and industrial buildings.
What are the risks associated with multifamily financing?
The risks associated with multifamily financing include prepayment penalties and required reserves. Prepayment penalties can be significant and some types of apartment loans require the borrower to keep a certain amount of cash reserved for necessary property repairs. This can limit an investor’s flexibility. Note that all HUD loans require reserves. Source 1 and Source 2.
What are the best strategies for securing multifamily financing?
The best strategies for securing multifamily financing depend on the type of loan you are looking for and the qualifications you have. Generally, it is important to be well informed and make the best decision for your investment and financial situation. It is also important to consider all options and speak with a multifamily financing expert to determine which type of loan is best suited for your specific needs.
Some of the most common types of multifamily financing include Fannie Mae and Freddie Mac loans, FHA loans, bridge loans, and CMBS loans. Fannie Mae and Freddie Mac loans are typically the most popular option for multifamily financing, as they offer competitive rates and terms. FHA loans are also popular, as they are backed by the government and offer more flexible terms. Bridge loans are short-term loans that can be used to finance a multifamily property while waiting for a more permanent loan to be approved. CMBS loans are commercial mortgage-backed securities that are backed by a pool of mortgages and offer competitive rates and terms.
When applying for multifamily financing, it is important to have a good credit score, a solid business plan, and a clear understanding of the loan terms. Additionally, it is important to have a good understanding of the market and the property you are looking to finance. This will help you to make an informed decision and secure the best financing for your needs.
What are the most important factors to consider when applying for multifamily financing?
When applying for multifamily financing, the most important factors to consider are the loan amount, loan-to-value ratio, and debt service coverage ratio. The loan amount is the total amount of money you will need for financing your multifamily property. The loan-to-value ratio is the ratio of the loan amount to the value of the property. The debt service coverage ratio is the ratio of the net operating income to the total debt service.
For more information, please visit Multifamily Financing: Your Comprehensive Guide.
What are the long-term implications of multifamily financing?
The long-term implications of multifamily financing depend on the loan terms. Loan terms, such as the length of the loan and the amortization schedule, will affect the total cost of the loan. For example, a longer loan term may result in lower monthly payments, but the total cost of the loan will be higher due to the additional interest payments. On the other hand, a shorter loan term may result in higher monthly payments, but the total cost of the loan will be lower due to the reduced interest payments.
It is important to consider the long-term implications of the loan terms when selecting a multifamily financing option. You should also consider the interest rate, loan-to-value ratio, and other factors when selecting a loan. For more information, please refer to our Multifamily Financing: Your Comprehensive Guide.