Are lenders lending less for real estate assets in today market? Are loan to value (LTV) rates falling? Are you having to put down more money to get deals done? Does this lower the returns on most deals you analyze?
If you are answering YES to these questions then you are like most investors in the market…but there is a quick a simple solution to the problem. Pay less!!
Lenders are not really lending less for real estate right now. They are still lending (on average) at a 1.25% debt service ratio (DSCR). If the seller’s asking price is causing you to have to put down too much money for the deal to work… its overpriced.
Note- DSCR is the ratio of net operating income (NOI) to the annual mortgage payment (debt service). A ratio of 1.0 would mean your NOI is equal to your debt service. No cash flow.
Lenders are not lending less, you are overpaying. Don’t blame the lenders for that one. If a lender is only willing to lend 60% LTV, they are basically saying to you “If you want to pay 20% more than the value of the asset, based on the NOI… go ahead! We as the lender are not going to cover it. 60% LTV is the new 80% LTV if you are going to pay those prices”. Pay less an you will be able to borrow more.
I understand that it’s easy for me to say “just pay less for real estate”, but math is math and lending is based on perceived risk in the borrower/asset. Higher prices create higher risks for lenders and that causes them to lower their loan proceeds (LTV).
Rising interest rates will cause the DSCR low decline as well. Raising the rents will counter this but one must consider who can ultimately pay more? Your renters in the cost of rising rents or the federal reserve in their ability to raise rates (until inflation is under control). Keep in mind that feds consider higher living costs as a core metric to inflation. Higher rents will equal higher interest rates.
Going forward there are only 3 areas of the real estate market that could (or will) be affected. Rents, returns or prices. If interest rates continue on their present course, either the prices of assets will fall, or returns to buyers (cash flow) will fall. If prices remain high and buyers demand cash flow… then renters are about to get crushed in high rents. Will they be able to pay if we go into a recession?
What’s your opinion of what is about to happen in the market?
