How To Raise Your Effective Rent 8%Paul Winterowd
Having read hundreds of articles focused on multifamily property and attended numerous industry trade shows, it is clear the vast majority of multifamily property owners are willing to do whatever they can to increase cash flows. I’m all for reducing costs, finding efficiencies and increasing rents but securing the right loan can make all that work look like child’s play. Your financing will have a big effect on your cash flow, your margin, and ultimately your return.
We are really loan program agnostic in that we truly work with our borrowers to find the loan that best suits their needs. That said, we find there’s typically a negative stigma surrounding multifamily HUD loans. Admittedly there is more bureaucracy to navigate with a HUD loan and there are some additional costs to get it funded but this really varies on a case by case basis.
The point is many multifamily developers or investors shy away from a HUD loan without really considering all the benefits. What the following example shows is how on a $10 million property with a HUD loan can dramatically outperforms the same property with a Freddie Mac or Fannie Mae loan.
Consider the following example of an agency (Fannie Mae or Freddie Mac) vs. HUD multifamily loan.
- Property Value: $10 million
- Units: 100
- Gross Annual Rent: $1.2 million
|Rate:||4.3%||4.15% (3.5 base rate + .65 MIP)|
|Term:||10 Year||35 Year|
|Amortization:||30 Year||35 Year|
The difference in payment is $7,619 per month, which annualized is $91,431 per year! This not only reduces the chance of default, but increases the property’s profitability. The HUD loan is also fully amortizing so it virtually eliminates any risk of being forced to refinance into a higher interest rate environment in the future.
The compelling notion to consider is what that savings of $7,619 per month really means. Following the example, the assumption is there are 100 units averaging $1000 per month in rent each. If you applied that payment savings to each unit, it comes out to be $76.19 per unit per month. I know a lot of property owners that would love to increase rents by $75 per month per unit. It is basically like increasing rents by 8% without any risk of tenants leaving. It isn’t a true rent increase, but a very real “effective” rent increase in that less of the rents collected is going to debt service.
Of course there are pros and cons to both multifamily loan programs in the example, but this simply illustrates how the right loan can make a big difference in cash flow. If you’re interested in learning more, contact one of Bonneville’s loan officers to review your options.