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In this first installment
of an article about the
factors that effect the
interest rate of an
apartment loan or
multifamily loan, we provides an overview of the different variables that
impact the interest rate either positively or
negatively. There are several factors that
either directly or
indirectly effect an
apartment loan's
interest rate. These
factors can be separated into 2 categories:
Internal
Factors -
Internal factors can be described as a variable(s) in which
a borrower has direct or indirect control over, or can
have influence upon. Internal factors that can effect the
interest rate on an apartment loan are:
- Loan to value (LTV)
- Term/amortization of
apartment loan
- How the apartment loan
is funded, i.e. portfolio, conduit, bank, bond, etc.
- Debt service coverage
(DSCR)
- Spread between index and
rate
- Broker points, if built
into the spread
- Property quality
- Occupancy rate
- Appraisal (poor comps,
large variance in methods, environmental factors, etc.)
- Apartment loan size
- Cash out when refinancing
- Property documentation:
financial statements, rent roll, tax returns, i.e.
- Borrowers/guarantors
credit rating
- Ability to verify and
document personal income
- Management experience
- Overall credit exposure
External
Factors -
External factors can be described as a variable(s) in which
a borrower has NO direct or indirect control over, nor can
have any influence upon. External factors that can effect the
apartment loans
interest rate are:
- Bond market
- Market capitalization
rate (CAP)
- Economic forecasts
- Market size
- Economic conditions
- Banks (lenders) current
portfolio
Now that we identified the
factors that can have a positive or negative effect on the
interest rate, naturally we will want
to dissect the controllable factors in an effort to
determine how to get the lowest interest on your apartment
loan or multifamily loan.
Before we
discuss the controllable factors, it is important to
understand the general theory of interest rates. In
summation:
- The greater the
risk associated with an apartment loan, the higher the
interest rate will be.
Interest rate risk can be
broken down into two components:
Nonsystematic Risks
- Credit risk
- the risk of default on the apartment loan due to
the credit worthiness of the borrower. Different
parties will be offered different rates on debt
obligations (such as apartment loans). The measure of credit
worthiness of an individual is called a credit
rating or credit score.
- Maturity/Term
risk - the risk involved in a long-term
investment.
- Liquidity
risk - the risk that the
apartment lender might not be able to liquidate the
debt on short notice.
Systematic Risks
- Inflation
risk - macroeconomic price changes, or
simply factors that may increase or decrease the
price of goods over time.
- Exchange
rate risk - currency fluctuation
Many of the factors associated with the rate of
interest a borrower will pay on an apartment
loan are macro and outside of our direct
control. Thus, we will focus on the factors in
which you can to a degree, control.
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