Real Estate Interest Rates and Lending in 2023

If you've been in the real estate game awhile now, you know that March 2022 completely turned the lending world upside down. Find out what happened and where you have to turn to borrow money, and what's in store for 2023. 

My name is Kenny Wolfe and I’ve been a real estate syndicator and investor for over eleven years; in this time, I’ve built a successful real estate investment firm, Wolfe Investments. If you’re new to the show, make sure to subscribe so you’re notified when a new episode comes out. 

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Transcript

Real Estate Interest rates and Lending in 2023

 If you've been in the real estate game a while now, you know that March 2022 completely turned the lending world upside down. Find out what happened and where you had to turn to borrow money and what's in store for 2023.

 Welcome to Real Estate Investing with Kenny Wolfe, the show with weekly topics designed to help you learn how to build your ideal life through real estate investing. My name is Kenny Wolfe and I've been a real estate syndicator and investor for almost 12 years now, and in this time, I've built a successful real estate investment firm, Wolfe Investments. If you're new to the show, make sure to subscribe so you're notified when a new episode comes out.

 March of 2022 was the date the Fed started to raise interest rates on what they called transitory inflation. Oops. They started moving up rates by a quarter of a point and have since then just kept mashing down the gas pedal, although now in March of 2023, it looks like they're backing off a little bit and maybe even talk of decreasing rates. But in 2022, the interest rates going up. What that did was caused instability in the market, and lenders love stability. So the fact that the Fed was on the move, it spooked a lot of lenders out there. So, what this did is the agency lenders, Fannie Mae, your Freddie Mac, your HUD, they backed off on the leverage on the amounts that they were handing out to lenders or to borrowers like us. And lenders all of a sudden were more choosing what kinds of real estate they were lending on and what was absolutely mattering.

 A lot of them would turn non-committal at the final closing hour. So it was absolutely driving us crazy both on the buy and the sales side. There were lots of extensions in 2022 and a lot of earnest money, additional earn money that'd be added to the deal to get the deals done. So again, the agency dropped their leverage amount and bridge lending was about done overnight. Once those rate, interest rate hikes started to go up and the biggest risks to our US economy would've been lack of lending, and that's exactly what happened in 2008, but this time it was different. The local and regional banks really stepped up on the lending piece. We were getting fixed interest rate loans and higher leverage than the agencies. That has never happened in the past 13 years that I've been investing in commercial real estate. So why do those banks have to keep lending and get their loan dollars out?

 Because the demand deposits, and that's all the checking and savings accounts here in the United States, if you tally them up, went from $1.56 trillion in November of 2019 to $5.17 trillion due to all of the cash that was doled out during Covid. All that cash got funneled into, mostly into people's bank accounts. And when you're a bank, you've got cash deposits. Those are actually a liability to you. You have to get those moving and getting to work and to lend the dollars out. So that's why they were forced to step up and really save the US economy. Fast forward to today, banks are still lending and the agencies are increasing their leverage and even have some really great fixed loans right now, fixed rates for US multifamily owners, we're even seeing some bridge lenders come out of their shell. So lending is definitely coming back in a big way all across the board.

 And the rates for multifamily housing are a lot lower than other interest rates for other commercial real estate properties. The reason being are the agencies have a mandate to provide us with cheaper loans. So we in turn can provide quality housing for our residents. Now, the Fed looks like they're pausing or maybe slightly going to raise the interest rates more, but they're about capped out when the Fed does raise the rate, it's not a direct correlation with the true interest rates we get in the market because the market reads the tea leaves and they try to predict the future of where rates are going to go, and those are the rates that you get. But when the Fed does raise the rate, it tends to increase rates across the board, but it's not always a one-to-one ratio. So what does lending look like in 2023?

 Banks still have a lot of cash to get moving, and those are a great option as their fixed interest rates less amortization. So again, you have to pick the right lending tool for the right job, but they're definitely still out there lending on some fixed rate loans. There's balance sheet lenders, they're back. They're a good option. If you have a value add asset where you're buying an asset, fixing it up, and then you want to move to an agency loan or a bank loan, you do have to buy a rate cap. Those that definitely have come down in cost. So those are still a good option for the right assets where you're adding a big value to the asset. And the agencies are definitely back in play. Now. They have fixed interest rates. We just saw one the other day of a quote, a 5.3% fix.

 Now they still have those big prepayment penalties, so you have to watch out for those. Again, they're a great tool if you're going to have a longer term hold, but if you're going to do a value add, probably bridge or bank loan first and then go to the agencies to get a cash out refi. So just make sure you watch out for those prepayment penalties if you go that route. So with lending coming back in full force and a lower deal flow as of March, 2023, we'll see a lot of buyers bid up pricing on assets that actually do hit the market. There's still a lot of cash out there, not just the loan side, but also on the investor side that's just sitting on the sidelines ready to pounce. That probably means we won't have a huge crash in multifamily properties. I think they'll stay right about the same because the underlying demographics and numbers are that the rental markets are still strong.

 Demand is still off the charts. They're still seeing rental growth in our portfolio because there still remains a huge housing shortage in our country, and it most likely got even worse. As the Fed started to raise rates, single family builders really backed off on getting new product, new single family product to the market. So our shortage even got even worse over the past six months or so. So if you take all that into account, those that invest today are going to look really smart in the next five years if you're buying up multifamily assets. Lending was flipped upside down in March of 2022 with the banks really coming in and saving the day. They picked up the slack from the agencies and other lenders that were in fashion prior to March of 2022. Today, the banks are still lending out on some great terms, but in addition, the agencies seem to be back and you even have some balance sheet lenders coming back as well. So with the lenders back in nearly full tilt investors sitting on the lines with loads of cash ready to go, we won't see a multifamily real estate crash this year. So those that invest in real estate today are going to look like geniuses in about five years. So make sure to be gritty when others are fearful and you're fearful when others are gritty. This has been Real Estate Investing with Kenny Wolfe. Thanks so much for listening.