Tuesday Commentary: What's In a Rate?

March 25, 2025

Spring brings with it increased activity in real estate investing. Why is that? Is it because the birds are singing, the flowers are blooming, the weather is nicer? Yes! Investors, just like most people, feel a surge of optimism to begin seeking out new opportunities, make new connections and put their money to work for them. Amid the media talks of high interest rates and housing affordability issues, the horizon still looks bright and enthusiastic. Let’s look at the right information to help you make sound real estate investment decisions.

Rates are volatile, we all know this is true. However, consider this, in discussing rates we need to understand that rates are contingent on borrower qualification and property qualification. One investor will be offered a rate in the 7’s and one investor will be offered a rate in the 9’s. The main reasons for the difference are these:

The Borrower

Experienced real estate investor verses non-experienced real estate investor

· Experienced real estate investors are seen as a lower risk to lenders. If the investor has a track record of successful purchases and value add, lenders have more confidence they will follow through with their projects.

· Conversely, an inexperienced real estate investor without a track record of successful investments will not have as much confidence from a lender standpoint.

The Property

Performing Property verses Non-Performing Property

· If the property is occupied and produces income from rents, this is considered a performing property. A non-performing property is a vacant property.

· It goes a little further than that. The best real estate investments are properties located in urban locations with lots of infrastructure.

There are three classes of Commercial properties. Class A, Class B and Class C. (Note: These same parameters are applicable in 1 to 4 units as well)

· Class A: These properties represent the highest quality buildings in their market and area. They are generally newer properties built within the last 15 years with top amenities, high-income earning tenants and low vacancy rates. Class A buildings are well-located in the market and are typically professionally managed. Additionally, they typically demand the highest rent with little or no deferred maintenance issues

· Class B: These properties are one step down from Class A and are generally older, tend to have lower income tenants, and may or may not be professionally managed. Rental income is typically lower than Class A, and there may be some deferred maintenance issues. Mostly, these buildings are well-maintained and many investors see these as “value-add” investment opportunities because the properties can be upgraded to Class B+ or Class A through renovations and improvements to common areas. Buyers are generally able to acquire these properties at a higher CAP Rate than a comparable Class A property because these properties are viewed as riskier than Class A.

· Class C: These properties are typically more than 20 years old and located in less than desirable locations. These properties are generally in need of renovation, such as updating the building infrastructure to bring it up-to-date. As a result, Class C buildings tend to have the lowest rental rates in a market with other Class A or Class B properties. Some Class C properties need significant reposting to get to steady cash flows for investors.

For investors looking for capital preservation, Class A may be the right investment. For investors looking for capital appreciation, Class B and C may be better investments for that specific risk profile. It comes down to this: Ask yourself if purchasing a Class B or Class C may work better for your Net Operating Income (NOI).

The perfect scenario is a real estate investment you can purchase for a good price, add value to if necessary and rent for top dollar. Fortunately, there are loan programs that allow you to spruce up the property with the cost of renovation figured into the loan. However, if you want a turnkey property, a Class A property may be best for your investment goals.

The bottom line is rates are dependent on you, the borrower and the quality of the real estate investment. Knowing your tolerances, knowing the market and knowing your options are the keys to your success.

I can be reached for comments or questions at: cjones4loans@gmail.com