Banks hedge their interest rate risk! You can too! With Interest Rate Swaps!

​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.