When Cap Rates Are Lower Than Interest Rates

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Thanks Peter... The only trouble is *DEBT SERVICE*. Most lenders want the income to cover 1.25X the debt service. Getting a loan on a negative cash flow deal based on speculative rental increases is almost impossible, most lenders would require additional collateral or a much larger down payment. A hard money lender will hurt you bad.

DEAL MUST CASH FLOW, DON'T BASE ON JUST EQUITY INCREASE. Using your example, over 5 years the NOI increased to $127,500 which increased the price to $2.55M at 5% THE BIG BUT..... Over the 5 year period if the Cap rate increases to Cap = 6.375% NOW the Price is back to $2M. You just lost the 5 year equity Increase, But if you have CF then you are still good, THEREFORE the property must CF, To many investors are buying properties that are Not cash flowing and when time comes to get new commercial loan they are going to loss their property. If I am wrong please make to video explaining, I have been following you for years and thanks for the great education but always more to learn.

The advice given here about forced appreciation through raising rents 5% a year works for multi family if rents do not soften but it would not work for another asset class like STNL or MTNL unless they were way below market rents. It should be noted that this advice is very specific to multifamily. However, it should be mentioned as others here have pointed out that interest rates are likely to keep rising which makes the investment worth less and less due to the risk free rate of return being a better and more attractive option for investors with capital to invest.

I'm not sure it would be fair to assume 5% rent hikes over the next 5 years, especially in light of the tremendous rent hikes we experienced in the last few years. While I don't expect rent to decrease meaningfully, I would personally prefer to err on the side of conservatism when underwriting in the current uncertain environment. Moreover, if the fed stays at a higher interest rate level (more like a normal level when compared historically), it's very possible cap rates could rise in the next few years. However, I agree that being pencils down is not a good strategy, and my personal approach is to lead with creative financing (eg seller financing). Never stretch your assumptions during underwriting, and build in more conservatism and larger margins of safety in your pro forma models during market uncertainty.

Love it!!! Thank you!!!

I'm here in CA and I see some job losses already taken place. Rent increases tuff in an economy where food has to come first.

Great video. Learned a lot

Great Vid!

Thanks for the info Peter.

Thank you Mr Haris , I always learn

Thank you Peter!!!

Thank you Peter.

Great video, thank you!

Thanks for sharing

Great presentation. As lenders ask more down payment COC return goes lower than current CD rates which is keeping people ate fence.

Great video. I’ve been investing in single-family homes. looking at moving into multifamily.

Powerful info Peter. Thank you for all you do.

estimating 5% rent growth for next 5 years in any market without considering that market's historical rent growth from 2000-2020 and that rent has been dropping since 2022 in some markets is not conservative

Awesome