If you invest in any commercial real estate or 5+ unit multifamily deals. You know that getting a fixed interest rate for more than 5 years is almost impossible. Interest rate risk can be a bonafide threat to the performance of our business plan when underwriting investments in a rising interest rate environment.
Enter: Interest Rate Swaps.
Today I had breakfast with a company who sells a product to community banks called an interest rate swap. What they do is help you effectively fix your interest rate for 10 years as opposed to the traditional 5 year. Your interest rate will be marginally higher than if you stuck with a 5 year fixed however it may be worth paying a little extra for the safety of not getting caught in an interest rate reset when rates are high 5 years from now.
In addition to the predictability that this option provides, some of the other benefits are:
1.) There is no prepayment penalty with your bank when you use this product.
2.) You can potentially make a windfall if interest rates do rise. Meaning, if interest rates rise, you can sell the interest rate swap for a profit. However, if interest rates fall, you would have to pay out of pocket if redeeming a swap contract.
Matthew Drouin is a full time real estate investor and REALTOR with 12 years of acquisition, disposition, development and management experience in Rochester, NY.