In today's apartment game, especially with volatile interest rates, floating rate is the way to go. At least that's how one Atlanta apartment mogul sees things.
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RADCO founder and head Norman Radow says despite historic low rates—even with the expected uptick following Trump's election—the firm uses floating rate debt based on Libor when it buys apartments.
When it comes to his target buys, allowing the rate to float has made more sense to him—especially as his firm has seen rents rise as much as $400/month on some assets in a very short time.
“On average, I model in 20 to 25% rent growth in the first two years. So if I get that, and I'm locked in on a fixed-rate loan, I just lost a ton of money,” Norman says, adding that selling or refinancing the property once it's improved will incur a major penalty, due to the initial low-leveraged debt.
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Norman shares his insight weeks before he's set to be in the spotlight on our capital markets panel at our Atlanta 2016 Roundup & Outlook next month, along with Portman Holdings' Ambrish Baisiwala (here), Franklin Street's John Leonard, Marcus & Millichap's Mike Fasano and Graham Group's Jeffrey Graham.
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But when it comes to the recent blip upwards in interest rates, Norman speculates that perhaps it's similar to what transpired in 2013 when the Federal Reserve hinted that quantitative easing was coming to an end. It caused interest rates to spike some 75 basis points in a couple of weeks, and Norman says he saw pending apartment transactions suddenly get re-traded or scrapped altogether.
Then a month or so later, things calmed and cap rates continued to compress. The same thing could be happening now.
“We may even have overshot [the] interest rate climb,” he says, noting Libor hasn't moved much at all during the same period. “If I am wrong, I can become a Fed governor, since they have not been right for years now.”
That's putting RADCO on the same acquisition path as this year, when it will finish out with 14 new apartment purchases, including The Landing at Acworth (here), a 240-unit Class-A project RADCO bought for $23.3M this past summer.
“Nothing fundamental has changed,” he says, "and the Fed rate rise has been in the works for a long time."
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Hear more from Norman at our Atlanta 2016 Roundup & Outlook at 7:30am, Tuesday, Dec. 6, at the InterContinental Buckhead along with other Atlanta business elites Atlanta Braves president Derek Schiller, Daniel Corp president Pat Henry, Atlanta City Council president Ceasar Mitchell (here on left), Cumberland CID Executive Director Malaika Rivers and MARTA CEO Keith Parker. Register here.
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