When low interest rates linger, it’s easy to talk oneself into believing they have ample time to act on locking in their interest rates. In reality, though, “Nothing is permanent, especially low interest rates,” says Cambridge Realty Capital President Jeffrey Davis. Getting lulled into complacency by ongoing low interest rates can be a dangerous game that may ultimately cost an operator a significant amount of money.
For operators who are on the fence about whether or when to lock in, Davis advises owners to follow these four rules when making a decision:
DON’T play with the economy. The odds aren’t much better than casino odds, but there’s a lot more at stake than losing one’s pocket money on the slot machines.
“Waiting for even a day can end up costing tens of thousands of dollars in interest,” contends Davis. He’s seen it happen all too often in his years with Cambridge. “Woulda, coulda, shoulda” is a common refrain amongst operators who hold out too long. “The pain from a significant interest rate movement can never be recovered, especially on your project. Only you know how important seizing the day for lower interest rates is, especially in independent living and assisted living projects. Don’t wait and get stuck singing the ‘woulda, coulda, shoulda’ blues.”
DON’T confer with other operators. “If you asked 100 economists which way interest rates will move at any given time, almost invariably there will always be 30-40% who feel they’re moving up and 30-40% who feel they’re moving down and another 20% who don’t see any change,” Davis contends, “and these are highly-trained professionals whose job it is to watch the economy. If they can’t make an accurate prediction, no one can, including other operators.”
Davis acknowledges that it’s normal and perfectly acceptable to seek the opinions of colleagues when it comes to refinancing a loan. “Colleagues can be excellent sources for mining information about the best loan providers and loan process experiences,” Davis expresses. However, actual financial advice, he notes, is best left to experts. “Each operator has his or her own agenda,” he says with regard to offering their interest rate advice. “The bottom-line when it comes to interest rates is that when the numbers work on your project and the proceeds work, never hesitate to move.”
DON’T let superstition dictate your movement. “It’s too easy to talk oneself into deferring a decision, especially when it comes to locking in interest rates, by applying subjective parameters, such as ‘if rates drop 25bp-50bp I’ll move,'” says Davis. “In reality, this is nothing more than superstition and not grounded in science or statistics. Superstition merely gives one something to blame when they fail to act and end up paying more than they should have.”
Instead, Davis urges operators to ditch the superstitions that only lead to procrastination and “find a rate and a loan that works and move forward.” He adds, “We’ve been in an artificial market and economy for several years. Don’t believe this will last forever. Those who try to kid themselves are the ones that will be hurt.”
DO focus on the benefits of low interest rates and day-to-day management of your project. If you’ve been sold on the idea of acting instead of waiting for change that may not happen, Davis has this advice: “Realize that our economy is still manipulated by the Fed and quantitative easing. We are not in a period where low rates will be forever. They are a godsend that we have today. The key is to be objective. Always ask yourself ‘does this loan, interest rates and terms work for me?’ If the answer is yes, proceed, If the answer is no, continue to work harder to find what you need and move forward from there.”