Buy or Refinance Now

The valuation of income properties is directly tied to the cost and structure of financing. Real estate is a “borrowed money” business. As interest rates rise, the capitalization rate required to service the debt for a purchase or refinance also rises, and thus the valuation falls. As the valuation falls, existing debt Loan to Value (LTV) ratio exceeds the agreed maximum for commercial lenders, thus forcing a “margin call” on commercial debt that borrowers cannot pay, causing a technical default. Then the tide flows out and everyone sees who has been swimming naked. Commercial banks will crater and the FED will desperately try to print more counterfeit money at the expense of the tax payer to buy the bad debt.

Class C “Bread and Butter” apartments with high debt coverage ratio (DCR>1.5) can tolerate recessionary pressure on income and expense, but avoid Section 8 and Low Income Housing Tax Credit (LIHTC). Also try to refinance or buy now with FHA fixed rate with no balloon, amortized 25 years or longer and no prepayment penalty. You will be able to pay off the debt with debased “Bernanke Bucks”.

Learn how to buy apartments with Other People’s Money (OPM) with my course “Introduction to Income Valuation and Syndication” (click here).

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