Timing the Market – 3 Step Process to Win the Refi GamePaul Winterowd
Fear and greed are the two main drivers that commonly derail day traders in the stock, futures, and Forex markets. Given the wild swings in the stock market due to COVID-19, it is hard not to be intrigued with the quick gains the stock market could provide if only you pick the right side of a trade. 20% in a day seems way better than 20% in a year that real estate can offer.
Having played that game quite unsuccessfully several years ago, I am so glad I’m in real estate now.
As I have thought about my own investments in the multifamily space, I’m very thankful commercial real estate is not a readily liquid market. These transactions take a lot of time and effort. It is virtually impossible to make an impulsive reaction to news and sell your property in 30 seconds.
The day trading game is all about timing the market. And timing the market is really, really hard to do. Although we can educate ourselves, and with time and experience get a better feel for what will drive the market one way or another, it is still largely unpredictable.
Coming back to commercial real estate – how do we play the timing the market game? We do it with our refi’s. The purpose of this article is to provide you with a 3-step process at how to successfully “time” the market for your next refi.
Investors know that most commercial loans are tied to the US Treasuries either tightly or loosely. So we all watch that number rather religiously. As it dips down, we get excited and think about a refinance. As it continues to fall, we start to get serious and may start reaching out for quotes.
Then the 10 year gets even better, and we become more committed to the process. We ask for an LOI and we start thinking how clever we are to capitalize on these great rates.
But guess what?!? Everyone else is thinking the same thing. And the queues get bogged down. Initial underwriting now takes a week instead of a day. It takes another week to get an LOI instead of a couple days.
Any waivers and exceptions go right out the window because there is so much interest in refinancing that lenders don’t need to incentivize the borrowers.
Lender capacity is reached, and spreads go up really quick, even if the Treasuries continue to fall. Before you know it, the interest rates are higher than when you first started getting intrigued with the possibility of a nice refi that would increase your cash flow and put money in your pocket.
We saw this exact same scenario in the summer of 2019; and we saw it again this year with the COVID-19 pandemic. There was great opportunity to take advantage of great rates, but that window closed quite rapidly.
“Fool me once, shame on you, fool me twice, shame on me.” – Chinese Proverb
I want to share with you a surefire formula on how to capture those great rates when the opportunity presents itself again.
“If you put everything off until you’re sure of it, you’ll get nothing done.” – Norman Vincent Peale
Step 1 – Get your mortgage broker all the basic information they will need well in advance. Here’s the list:
- Rent Roll – Ideally from the current month and showing when tenants moved in and when leases expire.
- T-12 P & L – Profit and Loss Statement (Operating Statement) showing income and expenses to arrive at the NOI for the last years’ time. We want the trailing 12 months (thus T-12) broken out individually by month.
- Pro Forma/Budget – Detailed income and expense projections for the next 12 months of projected operations
- Ownership Structure – Summary of who the owners (General Partners) are, their ownership percentages and what percentage of the deal is owned by the General Partners (GP’s) and percentage owned by Limited Partners (LP’s) if there are LP’s.
- Personal Financial Statements – A summary of net worth (assets – liabilities) for all GP’s. Please include Schedules of Real Estate Owned as well. I’ve attached a template which you can use if starting from scratch. There are 3 tabs and all work together.
“The first step towards getting somewhere is to decide that you are not going to stay where you are.” – J. Pierpont Morgan
Step 2 – Have your property manager send your mortgage broker the rent roll and T-12 every month.
All they need to do is add an email address to the monthly email you already get. This really automates the process for your and allows your mortgage broker to stay updated and ready to start a refi application as soon as the timing is right.
I recommend updating your Personal Financial Statement with Schedule of Real Estate Owned on a quarterly basis. Have it ready to forward to your mortgage broker when the timing is right. Having to update it when you need it will only slow you down.
Step 3 – Know your strike price.
A good mortgage broker will be able to break down the costs of a refinance and show net cash flow gains and net cash out with your refi. This would include any prepayment penalty ramifications as well. I provide this summary with all my loan quotes because it is integral in the decision-making process.
This way you are actually dealing with real numbers, not just a gut feel.
Everyone has a threshold of where it makes sense to do the deal and where it doesn’t. That could be a certain interest rate to achieve better cash flow, it could be a certain amount of cash out, it could be a combination of both.
Regardless – think through an determine what that strike price is for you well in advance of the moment when the opportunity presents itself.
This isn’t rocket science here, but it is how you win.
“Do not delay; the golden moments fly!” – Henry Wadsworth Longfellow
What I have seen a lot of investors do is try to time the market perfectly. They wait until they perceive rates are the lowest and they pick up the phone and call.
At that point, they have already missed the window. The queue is full, and they are likely two weeks away from being able to start their application. Rates will likely have bounced up by then and they will continue to rise. They have missed the window.
The monster of greed caused them to delay, and fear of not timing the market perfectly prevented them from getting a great deal.
Preparation and knowledge are the antidote for fear and greed.
We get our ducks in a row, and have everything ready to start the process. We also know our numbers and think through a scenario that makes sense when the emotions aren’t driving our actions.
We let the numbers make the decision for us and when the market offers those numbers, we take advantage. Again, this is simple. Not always easy, but really quite simple.
Don’t miss that window the next time it presents itself. I’m here to help and ready to start the dialog with you.