Texas multifamily property prices have continued to rise as rents and occupancies continue to increase. Many investors locked in long-term fixed interest rates on Fannie, Freddie and CMBS loans in the past few years. After completing their business plan whether it was exterior and interior rehab or improving operations, many sellers are bringing their deals to the market with long-term assumable debt. In this article, we are going to look at the pros and cons of assumable debt so that an investor can evaluate whether they should pay off the existing loan and get new debt or assume the existing loan.
Pros of assuming existing debt:
+ Lower purchase price as seller avoids prepayment penalty
+ Interest rate on existing debt might be lower than current market interest rates
Cons of assuming existing debt:
- Leverage typically limited to 75% LTV vs. new debt could go up to 80% LTV
- Typically no interest only left in loan
- Limited loan dollars available for rehab
- Existing loan term might not match your investment horizon
- Longer time to close (typically 60-90 days vs. standard 45-60 days)
As you can see the cons outweigh the pros on a deal with a loan assumption, and thus these deals typically are trading for 25-50bps higher in cap rate due to a small buyer pool. Old Capital is experienced at working with investors on the assumption process and even adding supplemental loans to the existing debt.
If you have any questions on whether you should assume the existing loan or place new debt on your next acquisition, please reach out to James Eng at email@example.com or 214-300-5035.
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