As an investor and advisor to many Eugene commercial property investors, I attempt to mitigate risk and exposure to the market or things that can affect cash flow or property values. One factor that can make a big difference on you commercial property investments is the impact of interest rates and having the right type of debt in place when rates start to rise. This article points out several good tips, including having adequate cash reserves:
For an investor, interest rates are one of the main financial elements that can make or break the beauty of a deal. The fact is that it is almost impossible to predict what interest rates are going to do.
As McKenna outlines in this article, six steps can help prepare you as an investor for rising interest rates:
- Using sensitivity analysis
- Reducing leverage
- Using value-added strategies
- Being savvy in the use of fixed and variable debt
- Selling as a viable exit strategy
- Having adequate cash reserves
I endorse some of these steps in particular. I recommend to my clients that they have their mortgages paid at least one if not two months in advance as well as having back-up cash and a reserve account aside. That way if the market gets tough and they start to experience vacancy, they can weather the storm and not be forced to sell in a bad market. I had several clients survive 30 to 50 percent vacancies in the last recession simply because they had good cash reserves in the bank and were not being pressed by the bank.
I also value the sensitivity test. I use a detailed analysis spreadsheet that allows me to assist a client in analyzing not only their cap rate and cash-on-cash return but also the impact of interest rates and using leverage to purchase a property. Two hundred basis points higher in interest rate can directly impact the bottom line of net income, meaning it’s critical for an investor to know and understand leverage.
The good news is this, as Mckenna notes: “Rising interest rates are usually a sign of solid and healthy economic growth, which can also increase the value of a commercial property investment.”
This is an excellent time to invest in multifamily properties in the Eugene and Springfield areas. The professionals at Pacwest Commercial Real Estate are Eugene multifamily experts. We’re here to help you find the right property to meet your investment goals, and to guide you through the process. You can reach us at 541-687-5871.