No, we’re not crazy! We’re getting this question a lot right now… why the heck would we want to be doing a refi with rising interest rates.
Well, a lot of people are coming from the perspective of single-family assets. And it’s a little bit different when it comes to value add multifamily assets. In this bonus episode, Dan is going to breakdown all of the benefits we are going to see from doing a refi in this current climate. You might be surprised!
Find out on this week’s bonus episode of Multifamily Investing Made Simple!
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“One of the biggest things we’re trying to accomplish with a cash-out refinance is to extract some of the newly created equity from our forced appreciation business plan that we executed.” – Dan Krueger
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Refi With Rising Rates
[00:00:00] Dan: Why the heck would you do a refinance with interest rates rising? That’s what we’re gonna talk about today
was going on guys. Dan in Victus. And today I’m gonna explain the logic behind refinancing a building while interest rates are rising. Now we could ask this question a lot. Why would you guys refinance a property when interest rates are rising? Like they have been for the last oh six, eight months or so, and it’s a very good question.
I think a lot of people who are asking that question are coming with the context of a, uh, single family homeowner. Uh, more specifically coming from the context of somebody who owns, uh, the house they live. And they want to potentially refinance their house nine times outta 10, the catalyst for a homeowner to refinance the house they live in.
Is to get better terms or a better [00:01:00] rate now on an investment property, like an apartment building. Yes. That’s always a benefit. If you can get better terms or better rates, that’s always something that’s gonna be good if you can do it, but that’s not the whole point. And I would say it’s not even the biggest part of doing a cash out refinance on a value add multi-family deal like we do here at Invictus.
One of the biggest things we’re trying to accomplish with a cash out refinance is to extract some of the newly created equity from our forced appreciation business plan that we executed. Take that in a non-taxable event, give it back to investors so that they can reallocate it into something else.
That’s the biggest factor. That’s the biggest thing that we’re trying to accomplish. And if we can get a better rate, that’s great. Now we are in the middle of a transaction right now on an asset that we picked up back in 2020. Now we, we had an interest rate with a local regional bank of about 3.8, 5%.
Not too shabby. We are gonna refinance that right. Into a Freddie Mac loan product. Now this is agency debt. So there’s gonna be a few things that are better in this situation. Had a 3.8, 5% and we’re [00:02:00] gonna have about a 4.6% interest rate in this new loans. Most people are saying, why would you wanna go from 3.8 to 4.6?
I’ll tell you there’s a few reason. Number one. We’re going from a 25 year amortization to a 30 year amortization with Freddy. We’re also getting, uh, longer term so that we’ve got another five years before we have any kind of maturity dates. We get to extend, uh, the runway with respect to our debt. Uh, we don’t have to worry about that maturing anytime soon, we also get interest only for a year.
So even though our loan balance is going up with this refinance, we’ve added. 55 to 60% in value to that building since we acquired it, our loan balance is gonna go up. Our debt service is actually gonna be about the same. We’ve got interest only payments for the next year. so our cash flow to investors is gonna be about the same.
Uh, the first month we have that new loan payment as it was with the old loan that we had. So cash flow is gonna be about the same. The terms are actually improving. Yes. The interest rate goes up a little bit, but we’ve got a longer runway to work with here and we’ve got [00:03:00] non-recourse debt. Now, biggest thing is we get to send people.
About 55 to 60% of the money they invested in a non-taxable event. And that enables them to, to access their equity without selling the building. And everybody owns the same percent of the deals they did on day one. So they get to take more than half their chips off the table. Take those. Without having to pay tax on them and go reallocate into something else.
And that’s extremely powerful. So all of those benefits more than outweigh, uh, the roughly 80 basis points of, of interest rate that we took on. So that’s why we choose to do it. Now. I’m not gonna say that that’s always gonna work. If we had 3% interest, uh, on our old loan and now rates were 10%, that would be a completely different situation.
But when we’re talking about going from the threes to the fours, it honestly doesn’t hurt the economics of the deal all that much. And the opportunity cost of not doing the refi and not relocating that capital into another investment is huge. So that’s why we opt to do cash or refinances, even if rates arising.[00:04:00]