Leverage is one of those things that can make or break your real estate investment portfolio. The proper use of leverage can minimize your tax burden, fuel portfolio growth and accelerate returns. The improper use of leverage can wipe away gains and bankrupt a company. We believe the US economy has cooled, home prices are peaking, and interest rates will continue to rise. These factors coupled together have formed our conclusion that now could be the best time in the market cycle to leverage your assets utilizing fixed debt.
Many real estate investors have enjoyed growth in the last five years fueled by loose purse strings at local banks and regional lenders. Even the GSEs have dipped their toes in the water. Large national firms like Blackstone’s B2R Finance (Now Finance of America Commercial) and Colony American Finance (Now CoreVest) offered five and ten year balloon notes on portfolios beginning in late 2013. Now, we find ourselves five years later, and what does the next five years look like?
Below are our forecasts and recommendations with regards to leverage and your real estate investment portfolio:
- Identify dates: Many of the “community bank” loans have renewal and adjustment provisions. Most real estate investors we talk to have no idea that most of these loans can be called due in full at the same time as they are supposed to “reset”. If you have any loans that are due to reset, adjust, mature, or renew in the next five years, now is the time to address those loans.
- Lock in rates: Many real estate investor simply cannot remember when a 9% interest rate on rental property from a bank was a good deal. Rates are still very low throughout the industry. We believe the best choice for most real estate investors right now is to lock in as much 10 year or longer sub 7% money they can get. The next five to seven years should see interest rates rise and fall several times. We are still in a very low comparative rate environment, so it is best to make sure any debt that might need to be addressed within the next decade be done so now.
- Cash Out: Many investors aspire to pay off their rental portfolio. While this is a noble idea, most real estate billionaires believe in the opposite. The ability to responsibly borrow tax free money (that your tenants will pay back) which you can use as reserve funds or even growth capital is something that powers real estate investing at all levels. We have clients that live virtually tax free by refinancing their rental portfolios routinely. With the introduction of cash flow based cash, out refinances; investors now have an avenue to systematically re leverage their portfolios.
In short, we think:
- Property Values are high (which helps LTV limits on loans)
- Rates are still low (historically)
- There are market shifts coming (which is why you don’t want exposure to adjustments, renewals, and loan maturity)
These factors make use believe now may be the perfect time to stabilize the debt on your rental portfolio. Reach out to our team of real estate investment loan specialists today to have a conversation about your needs.
Want to call us? Call 972-737-1850
Want to email? Click Here
Have questions or comments? Let have a conversation below. Find this article helpful or thought provoking? Share it please.