The Federal Reserve announced yesterday that interest rates had been lowered. There has been an anticipation of the Fed dropping rates, and the market was expecting a 25 basis point reduction. What does it mean for multifamily investors?
Stronger Cash-On-Cash Returns
Nine months ago, we were underwriting multifamily deals using nearly a 5% interest rate on the mortgages. Since the spring, we’ve seen a reduction in mortgage interest rates in the market. Now that the Fed has reduced the Federal Funds Rate, I expect over the next 45 days we will see mortgages rates continue to come down even further and closer to 4.00%
While I don’t think rates going down will bring a surge of new investors into the market, I do think the current interest rate environment will make current inventory more attractive and gives investors more incentive to buy now. The cash-on-cash return is now stronger.
Barring any negative economic news (beyond what we see priced into the economy), we may see another 25 basis point reduction in 2019.