Earlier this month, the Federal Reserve once again raised interest rates by a quarter of a percentage point, marking 10th straight interest-rate hike since last March in what has been the most aggressive rate-hiking regime since the 1980s.
I know I’ve discussed these frequent rate hikes in previous updates—specifically how KeyCity’s investment philosophy is designed to help navigate these fluctuations—but since high interest rates seem to be the reality for at least the near future, I’d like to provide a specific example of one way our team is changing course to address this latest gust of economic headwinds.
Since the start of the new year, our team has increasingly been utilizing an assumable mortgage option when acquiring new properties for our portfolios. As Bankrate.com explains, “an assumable mortgage allows a buyer to assume the rate, repayment period, current principal balance and other terms of the seller’s existing mortgage rather than obtain a brand-new loan.”
There is one big pro to this approach—the ability to secure a lower interest rate than we could based on the current rate from the Fed. And it’s one that many other private equity investors are currently exploring. According to an article from WealthManagement.com, “loan assumptions appeal to investors because fixed-rate debt that was secured in prior years is very attractive compared to today’s higher rate environment. If the loan originated prior to June 2022, the rate on an assumable should be far more favorable than the rate a borrower can currently obtain.”
On the other hand, it’s not an approach we can or would want to use for every deal. While the lower interest rate is nice, it’s important to consider that this type of financing is not always the best option—or even available. And when it is, the assumable loan option does require us to come to the table with a great deal more upfront cash in hand than we would for a more traditional financing option. Because of that, it’s important to consider how making that larger upfront, cash purchase will impact our investors—and do all we can to ensure we practice fiscal responsibility on their behalf.
The myriad complexities and considerations that come with private equity financing are often onerous—regardless of the country’s current financial situation. The economic landscape can change frequently and without warning. This is just one of the many reasons KeyCity Capital is built on a foundation knowledgeable, in-house management and a vertically integrated team that has both the financial acumen and experience that allow them to confidently assess ever-changing economic climates and adjust our acquisition strategies accordingly.
If you’re interested in learning more, I’d encourage you to set up a call to speak with us today.