Loan Assumptions: A Solution to Rising Interest Rates?

by Eric Veith

Rising interest rates have put considerable pressure on real estate investors in the first two quarters of 2018. With cap rates remaining compressed (for now) and interest rates rising, the spread between the two is approaching zero, and cash flow on new acquisitions is shrinking. Agency-sourced debt, including Freddie Mac’s SBL program, has been a shelter from the interest rate storm over the last 18 months. But even rates on agency loans are getting harder and harder to swallow.

As a result, investors are seeking alternate methods of achieving acceptable cash-on-cash returns. Thankfully, the vast majority of the above-mentioned FreddieMac small-balance loans are assumable under the right conditions. Many of the SBL loans originated in recent years have rates under 4%, are further along in their amortization schedules, and are at a more advantageous position in their pre-payment structures than newly-originated loans would be. All of these elements enable superior returns for buyers, while allowing sellers to exit without pre-payment penalties and at higher prices than buyers would otherwise be able to justify.

In a market characterized by thinning returns, it’s a creative solution that should allow investors to make better sense of both acquisitions and dispositions. We have already been exploring the assumption process with a number of clients, and would be happy to offer our advice and experience if you think it might be an attractive option for you. Feel free to contact any of us for more information and further insight.