Optimizing Investments: Expert Debt Market Strategies
Debt markets and where it is today has been a hot topic. Rates are at the lowest they have been ever. This, in large part, has been fueling the significant price gains we have seen in the last 18-24 months. A lot of COVID loan restrictions have now been lifted. We try to absorb what’s going on in the market to make adjustments in our own business.
Be Careful with Debt, Even When Money is Cheap
Though money is cheap right now, we still like to be careful with our debt levels. If you take out too much debt, any downturn issues will be multiplied. On purchases, we are still using the same bank with sub 3% rates and 75% LTV on a 30-year amortization schedule. We raise money for work which usually means about 65% or less of the total project cost.
They usually have flexible prepayment penalties as well. A prepayment penalty is generally paid in the commercial world when you pay off a loan early. The big thing is we know how to work with them (they are a pleasure to work with), what the process is, and the timing. We like some flexibility if we want to refinance early or need to sell strategically. The result is we have fewer surprises during a transaction to contend with. Timing is a lot more limited on transactions these days that we need to know what to expect. Also, we have just found our bank offers some of the most competitive rates and terms. Part of this has been because we keep large deposits with the bank. This is an enormous benefit that our investors receive working with us. This bank does have limits on how much they will lend to us. Eventually, we will probably hit that limit. We have begun to look at other options.
Consider Refinancing Options When the Time is Right
Since we have had such a run-up in the last 18 months, the building we bought 15 months ago has appreciated like crazy. So, we are now considering the refinance. We are looking at options to refinance 65% LTV (Loan-to-Value) full-term interest only for ten years (meaning will be interest-only during the whole loan period). We would be able to take out about 50-60% of that initial capital. Even after taking out this cash because of the interest-only element, our payment would still stay about the same. We would be making the same and have a handful of cash we can invest in a new deal that we get a return off of. We have locked ourselves into very inexpensive debt into the long-term fixed that future fluctuations won’t affect us. Honestly, this is magic!
Right now, if you look at the cost of debt against inflation, they are paying us to borrow from them.
Debt today will be much cheaper later when inflation eats at it year after year. The dollar will be worth less later, so that debt will be worth less in the future. It’s not to say that you should be irresponsible with debt. Rather, you should be strategic. That’s why we do lower LTV loans with better terms because they are safe bets. It might not be the efficient use of equity, but we rest easy knowing we can absorb pretty much anything that gets thrown at us.
Stay Informed
We are constantly in the market talking to different debt providers to be most informed and make the best decision for each deal. We are continually reviewing our current loan terms to see if it’s time for refinancing to take some chips off the table and put us in an even better position.