It is May of 2022 and have interest rates gone up? Yeah, they've gone up a good half a point. Are they going to continue to go up? Probably going to be some more increases in 2022. So what does that mean to you as the investor? I want to talk about the type of investor that's going to be cleaning house for the next several months if they play their cards right.
So many of us have been hearing and sometimes seeing instances in which the rising interest rates are having an effect on deals. In some cases, offers are actually coming in below pricing guidance. Sometimes we're seeing a little bit longer due diligence periods because they know they're going to have to be working with the lender. And of course, in some cases, buyers who went to contract prior to interest rate spikes are now getting calls from lenders about the interest rates spikes which has caused some buyers to go back to their seller and discuss retrading on the price. Not a position you want to be in. I wanted to give you a little of my perspective as a multi-family broker who thinks long term about what is the best way for any one investor to accumulate the greatest number of units over the longest career. There are a couple things I’ve seen as a multi-family broker over the last five to seven years. Number one there's been so many new syndications born and most of these syndications, if not the vast majority, have been ones that sell in three to five years. So, their model heavily concentrates on interest rates and exit cap rates.
The second phenomenon I’ve seen is that because it's been a seller's market for such a long period of time that the moment the tiniest little change in that seller's power occurs i.e., interest rates increase, then almost as if every buyer in the world got together on a conference call and said we need to splash the world with prices are changing interest rates are going up cap rates are going up sellers values have to come down. And so the chirpings begin all over social media, phone calls, emails, talks with brokers, talks with sellers. It's almost like a known team effort to create an environment or a storyline to put sellers on notice that the world's starting to change. But I would be very careful to not try and jump on that bandwagon because it's going to backfire. Multifamily is the investment of the future. There is no less demand today than there was 60 days ago when the interest rates were lower. And that is evidenced by the fact there's still a tremendous number of investors after the same very few products for sale. But everything is relative. I understand that higher interest rates can lower cash on cash, and I’ve also heard from many investors it affects an exit cap rate. Short-term holding syndications, in my opinion, have to be careful not to let social media or your other syndication friends lead you to believe that the market is going to start freezing or going down in value. There have always been a minority of investors that are super powerful and win a lot of these deals. They are long-term holders; long-term holders are going to clean house in this environment because rising interest rates don’t have as much of an impact on them like it does of those who hold short-term. In addition, long-term holders only really look at exit cap rates to plug it into a model to come up with some sort of IRR to put in a prospectus for their investors. Otherwise, they really are worthless because you can't predict what exit cap rates will be in 10 15 or 20 years. These long-term holders, who own a lot of units, by the way because they rarely sell, will continue to get bigger and more powerful, which makes them look better during multiple offer situations. Also, these long-term holders are keenly aware that all of the other short-term holding syndications are far more affected by these rising interest rates and they know the effects of the exit cap rates are going to bring in their offers for less. So those investors who concentrate more on buying good real estate, and being flexible on the timing of that sale, will always exit at a tremendous sale price and payouts will be fantastic to their investors, rather than buying good real estate that's dependent on a certain exit period. Hear more by watching the ending of the video below.
