Interest Rate Hedging

It seems like rising interest rates are the number one risk for RE investors today. Does anyone know how investors are mitigating this, whether allocating to specific asset classes or using capital structure/debt terms?

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4 Comments

Count_Chocula

RE

5y

I have no fucking clue what is going to happen with rates, but below is how I manage/think about them:

For floating rate deals, we have a consultant that we use to actively manage our interest rate risk via caps, corridors, swaps, etc.
For fixed-rate deals, the rate risk you are taking is in your exit cap assumptions. For example, f you are underwriting multifamily exits at 4.0% cap rates (I am) then you are basically underwriting rates staying flat/moving lower during your hold period. Nothing you can really do about this; it is just the risk we take. Be mindful of your overall leverage.

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Authored by: Certified Real Estate Professional - Vice PresidentCertified Real Estate Pro

StabilizedYOC

RE

5y

Can you further expand on when you use swaps? Never understood them and their value for the borrower. Thsnks

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Authored by: Certified Real Estate Professional - 3rd+ Year AssociateCertified Real Estate Pro

Count_Chocula

RE

5y

Honestly, we don't really use them because there are better alternatives (caps and corridors), but I do know some developers use them because their loans are often of a shorter duration.

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Authored by: Certified Real Estate Professional - Vice PresidentCertified Real Estate Pro

C.R.E. Shervin

RE

5y

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Authored by: Certified Real Estate Professional - Associate DirectorCertified Real Estate Pro

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Interest Rate Hedging

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Interest Rate Hedging

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