As we all know, the economy is in a deplorable condition with the resultant high unemployment and slow, or perhaps no, economic growth. On the surface, it would appear that this is an appalling situation and can do nobody any good. However, there is one aspect of this situation which can be of benefit to apartment building owners. Currently, interest rates for the financing of income producing property are at an all time low which offers the apartment building owner the opportunity to refinance their property.
In the past, adjustable rate mortgages were the most predominant loans offered by the banks. Today, fixed rate loans ranging from five year fixed, seven year fixed and even 10 year fixed are available at low interest rates and most of these are amortized for 30 years due in 30 years. After the fixed rate period, the loan automatically converts to an adjustable rate loan. This insures that the apartment building owner will not be without a loan after the fixed rate period in the event that money is not available at that time. However, the loan can be refinanced again after the fixed rate period if attractive rates are available at that time.
Refinancing your apartment building at a lower interest rate can result in greatly reduced monthly payments or perhaps allow cash out to purchase additional units or a combination of both depending on the current existing loan to value. The equity retained in your apartment building could be acquired for your use while retaining the same or even lower payments by refinancing with the currently available lower interest rates.
It is a common fallacy that today banks are not lending and that finance money is non-existent. This is not true. The banks are lending and, in fact, must lend to generate the income required in order to conduct the bank’s business. It is true that the banks have tightened up on the lending guidelines. For example, in the past, the debt service ratio (DSR) was acceptable at break even, that is 1.00. The debt service ratio is the ratio of the amount of rental income money after expenses as compared with the amount of the payments of the proposed loan. Currently, the majority of the banks require a DSR of 1.25 and some banks even higher. Along with the higher DSR requirements, a lower loan to value (LTV) is now the norm.
Again, in the past, 80% LTV was acceptable and in some cases, even higher LTV’s were accepted. Not so at this time. Generally, the maximum LTV is 70% however some banks are limiting the LTV to 60% and with selected banks even lower. The object of a successful refinance is to find the right bank with the right combination of guidelines to secure the maximum benefits of the refinance.
In the 35 plus years that I have been financing income producing property, I have seen the interest rates rise and fall. Do you remember when the prime rate was 21½%? Financing rates at that time were out of sight. Today’s rates are the lowest I have experienced since I have been financing and I can urge apartment building owners to take advantage of this exceptional opportunity.
The above article was written by Bud Smythe of Smythe & Associates. Mr. Smythe has over 35 years of experience in financing. If you have any questions or wish to speak with Bud about refinancing you apartment building, please contact him at 562-598-2840.