When Leverage Does More Harm Than Good

We are increasingly looking at value property investments on an all-cash or very low loan-to-value basis in focusing on small to medium sized value-add apartment and commercial properties in the $2-25M million range.

The mortgage rates in this size range are automatically higher because it is less cost-efficient/effective for mortgage lenders to make these loans because they take the same amount of work and cost. Further, in the case of apartments, the lowest rate loans are determined based on in-place cash flow when a property is stabilized.

But what loan options are there for value-add properties with little to no income in place? The only loan options here are very high rate bridges that put a time clock on completing the value-add plan. This effectively adds risk and costs to your plan during a time period when execution is a lot uncertain.

The opportunity today is to assemble a nimble, but strong, pool of capital to target near-term property dislocation and rates environment and sell/refinance into medium-term strength. If you can capitalize near-term dislocations and refinance them into medium-term strength, it behooves capital to stay in and ride compounded rent appreciation over the long-term horizon (5-10 years+).