The wait is finally over. The Federal Reserve cut interest rates by 50 basis points (0.50%) at their September meeting. But what does this mean to your multifamily investments? There are several short-term and long-term impacts on a multifamily asset that could make a struggling asset a winner.  

Lower Financing Costs

Reduced interest rates decrease the cost of borrowing. This makes it cheaper for investors to finance property acquisitions, leading to higher potential returns on investment. This also helps with certain loans that a property has in place. 

For example, if it is a floating-rate loan, you will see a decrease in your monthly debt service in the short term. The impact is more prolonged if it is a floating-rate loan with an interest rate cap. The impact will only be felt when the interest rate falls below the capped rate or when it is time to purchase a new interest rate cap. These interest rate caps are priced based on what a rate cap provider (bank or lender) believes will happen to interest rates over the next six months, twelve months, three years, etc. If they believe interest rates will come down, so will the cost of purchasing a new interest rate cap.  

Increased Property Values

Lower rates typically enhance buyer demand. As financing becomes less expensive, more investors are willing to purchase multifamily properties, driving up property values. This will not be seen immediately, as changes in property values usually take six to nine months after an interest rate change. 

Enhanced Cash Flow

This is an immediate impact because, with lower mortgage payments, investors can experience improved cash flow, which can be reinvested, used to cover operating expenses, or restart distributions that were on pause.

Greater Investor Activity

Lower rates often attract more investors to the multifamily market, increasing competition and potentially leading to quicker sales and higher prices. This has a longer-term impact, and it will take time to build momentum in the market. 

Cap Rate Compression

As interest rates decline, cap rates (the ratio of a property’s net operating income to its purchase price) often compress. Investors may be willing to accept lower yields due to the cheaper debt, pushing property prices higher. Even though the net operating income (NOI) can be helped in the short term, this is another longer-term impact as the true valuation, not a broker’s opinion of value (BOV), is achieved when the asset is sold. 

Improved Tenant Demand

This is a longer-term impact, but lower interest rates can stimulate the economy, potentially leading to job growth and higher demand for rental units, which can enhance occupancy rates and rental income.

Long-Term Stability

For existing property owners, lower rates can provide opportunities to refinance existing debt at better terms, improving financial stability and potentially freeing up capital for other investments.

In summary, lower interest rates create a more favorable environment for multifamily investments, enhancing each asset’s value, demand, and financial viability.