We’re back with another episode of The MHP Expert Podcast! Today, Jason and I sat down to discuss a big, hot button topic: MHP Debt. In particular, we’re looking at how rising interest rates will impact our beloved industry, and real estate as a whole.
The interest rate is a strong contributing factor when it comes to establishing value. It’s a huge catalyst exploited by the industry. For starters, a higher interest rate means a higher cap rate most of the time. As stated in the clip, investors need a certain amount of spread between an interest rate and a cap rate to hit their marks.
Why The Higher Interest Rates?
“Most investors are looking for about a 3 point spread, which is about a 20%, 10 year IRR.” But with today’s growing interest rates, the race to do this has become a bit more complex. But what’s the cause of all this?
Interest rates have been categorically low for quite some time. Ever since the last recession, the rates have been a big help in recovering. But as always, what goes up must come down, or in this case, the opposite. And with a world-stopping event like the pandemic, things kicked even further into overdrive.
Long Term Debt
Speaking of the pandemic, much of the financial reprieve came in the form of even lower interest rates on long term debt. The kicker though, is that most investors likely didn’t go down this route. Many instead elected to go for the quicker flip.
Bridge loans, or a loan with a balloon is more likely to be what investors went with. But what does that mean now that interest rates are on the rise? Well, the shorter your loan term, the higher your interest will be when it comes time to refinance in a few years.
Options For A Subpar Deal
Interest rates have already seen a considerable spike just in the last 4 to 5 months. This can be a huge handicap for those in less than stellar deals and markets. We outline a scenario in the clip above that goes into detail about how complicated this situation can get.
Unfortunately, you’re not left with many options in this case. The best advice would be to prepare for the hit if you plan on selling in a few years. Hopefully we won’t hit the more extreme projections for the rate, but it’s good to keep an eye on things to determine your best step.
How The MHP Expert Can Help
The federal government has already announced plans to raise rates by a single point or so by the top of 2023. There are even rumors of an initial hike being right around the corner. Listen above to hear the rest of our talk on MHP Debt!
Have more questions? Looking for a seasoned partner to help guide you through your current circumstances? The MHP Expert can help! Contact us today to learn more.