Everyone is losing their minds over the rising interest rates. You see it all over the news and on social media. But lets get real for a second…
Rates were 2, 3, 4% and now they’re going up to 5, 6, 7%… that’s still relatively low. Rates might not be rising to a scary level, but actually just leveling out.
Here’s what to actually look for when taking on debt:
Your Debt Terms, Optionality, and Long IO periods.
So, what does that all mean?
Find out on this week’s bonus episode of Multifamily Investing Made Simple!
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“I can keep as much of my cash flow for as long as possible and without dipping into my reserves without dipping into my CapEx interest, only periods allow us to do that.” – Anthony Vicino
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What To Look For When Taking On Debt
[00:00:00] Anthony: Everybody’s talking about rising interest rates and how it’s the end of the world for real estate investors. But you know what? I don’t care at all about interest rates. Here’s what I care about.
All right. So here’s what I care about when it comes to putting. Debt or using leverage to acquire real estate asset. A lot of people focus on interest rates. It’s been on all the news. Everybody’s losing their minds because interest rates have doubled in the last 6, 7, 8 months. You know, number one is, remember we’re in historically low interest rate environment for the last couple of years where you could get debt for two, three, 4%.
That’s incredibly low. So the fact that now we’re at five, six, 7% honestly is still pretty good in the grand scheme of things. interest rates do matter because it’s gonna affect how much cash flow your building is gonna be kicking off. If you have lower interest rates, then it means your cost of [00:01:00] capital.
Your cost of debt is lower. So you’re gonna have more cash flow. That’s great. But in the grand scheme of things, you’re not gonna see a massive difference in your cash flows from a 5% interest rate to a five and a half percent. It’s gonna affect it. Yes, but not as much as you think for me, what I care about way more than the interest.
Is the optionality of my debt terms. Okay. So here’s what I mean by that. It’s always about your exit strategies. And what I look for in debt is debt terms that give me the maximum optionality when it comes to my exit potential. So the things that I really like to look at. Is the length of term that’s number one, I want really long term debt.
I don’t want two, three years because I don’t know what the, the lending environment’s gonna look like in two or three years. I don’t know what the macro market environment’s gonna look like. It could take a big dip and my values could be a little bit low and suppressed. And I never want to find myself being a motivated seller because my debt terms have run up.
So one, I like really long debt terms, five, 10 years, as long as I can get them, because the [00:02:00] longer the runway I have, the more likely I am to find the. Perfect moment to either sell or to refinance. Remember, guys, time is always an investor’s best friend, so give yourself as much of it as possible. So that’s the one thing that I look for.
I love long term number two, I look for interest only periods. I like to know that. I can keep as much of my cash flow for as long as possible and without dipping into my reserves without dipping into my CapEx interest, only periods allow us to do that, especially in the value add model where we’re going in.
We’re deploying a lot of capital in the early days to make renovations and improve our properties by not having to pay down the principle in the early years. It just keeps more money in the bank for later, which gives us more option. and the third thing I really love I look for is the prepayment penalties.
I want to understand how am I going to get penalized. If I try to exit this deal early, it doesn’t do me necessarily any good if I have a 10 year term on my debt, but I also have a 10 year prepayment penalty where [00:03:00] if at any point I exit it, I’m just gonna have to pay the entire amount, um, of de deviance.
Right? So what that means is any of the money that the bank stood to make from that. Even though you’re paying it off early, you still have to pay it back. I don’t like that because it reduces the, the power of the long term debt. Anyways, what I wanna find is maybe a prepayment. That’s gonna step down.
Maybe it starts at 3%, then 2%, 1% in years, 1, 2, 3, and by years, three or four, it’s pretty much gone. I love that because then it gives me the choice in years three or four, if I wanna refinance or sell it, I can do that. Heavy consequence. The other way that you can get around prepayment penalties is by working with banks, local credit unions that have you have a good relationship with.
And so you come to an understanding, Hey, if I refinance this building with you in years three or four, and I keep the debt on your books, can we wave that prepayment penalty? A lot of times these credit unions and small banks will allow you to do that. In, in the end, they just wanna make sure that the, the, the debt’s not leaving their books, they’re still gonna be collecting interest [00:04:00] rates on it.
So those are the things that I look for, I think are way more important than a lot of people neglect. Cuz they focus on the interest rate way, way, way too much in the end. I want to know how am I gonna get out of this building? And I wanna have as many options for that as possible. The ways that I do that long term.
Low prepayment penalties, long IO periods. So if this was helpful, if you liked it and you want more content like this, make sure that you hit that subscribe button. You hit the, like you leave some comments on all that stuff so that you can help us grow the channel. And you also get informed as soon as a new video goes live.