When interest rates doubled, property values didn’t just decline. They exposed who truly understands real estate finance—and who was just riding the wave.
Why This Matters Right Now
The link between interest rates and property values isn’t theory. It hits your bottom line every day. Understanding these dynamics separates successful investors from struggling ones.
The Brutal Math of Cap Rate Expansion
When cap rates rise from 5% to 6%, property values don’t drop 1%. They drop 17%.
Here’s the proof:
- Property generating $1M NOI at 5% cap = $20M value
- Same property at 6% cap = $16.7M value
- Your equity just shrank by $3.3M
This isn’t a paper loss. It’s real money affecting real loans with real consequences.
Why Rates Drive Everything
Interest rates push cap rates higher in three ways:
- Direct cost. Higher rates mean higher debt payments. Investors need higher returns to compensate.
- Competing investments. When Treasury bonds pay 5%, real estate must pay more to attract capital.
- Risk premium. Uncertainty about future rates makes investors demand extra cushion.
The Fed’s rate hikes from 2022–2024 triggered all three at once.
Today’s Lending Reality
Remember 75% LTV loans at 3.5%? Those days are gone.
Here’s what lenders offer now:
- LTV: 60–65% maximum
- Rate: 7–8% if you qualify
- DSCR: 1.35x minimum (up from 1.20x)
- Recourse: Often required for any leverage
That missing leverage must come from somewhere. Usually, it’s your pocket.
Creative Financing That Actually Works
Seller Financing Bridges the gap when sellers won’t accept today’s prices. Structure a 5-year note at 6% when banks want 8%. Both sides win.
Preferred Equity Fills the space between senior debt and your capital. It’s expensive—12–15% returns—but cheaper than giving away half your project.
Assumption Plays Find properties with assumable low-rate debt. That 3.5% loan from 2021 is worth its weight in gold. Pay a premium for the property to capture the cheap financing.
The Value-Add Imperative
In high-rate markets, standing still means falling behind. You must force appreciation through active strategies:
- Boost NOI through better operations
- Reposition to capture higher rents
- Cut expenses through efficiency
- Add income from unused space
Buy at a 7% cap. Improve to an 8% NOI yield. Sell at a 6.5% cap. That’s how you profit despite the rate environment.
Development vs. Acquisition
Development faces double pressure right now:
- Construction loans at 8–10%
- Exit values compressed by higher cap rates
Many projects no longer pencil. Focus instead on:
- Ministerial approvals — faster means less carry cost
- Adaptive reuse — cheaper than ground-up construction
- Pre-sold or pre-leased projects — certainty earns better terms
Fixed vs. Floating: Choose Wisely
Floating rate horror stories are everywhere. That 3% floating loan from 2021? It’s now 8%. The property can’t cover debt service.
Fixed rates offer certainty but come with trade-offs:
- Higher starting rates
- Steep prepayment penalties
- You’re locked in if rates drop
Choose based on your hold period and risk tolerance. Not rate predictions.
The Opportunity Hidden in Distress
Higher rates create distress. Distress creates opportunity.
Look for:
- Overleveraged properties facing maturity defaults
- Floating rate victims needing quick sales
- Developers who can’t finish projects
Cash or creative financing wins these deals.
The New Normal
Markets expect rates to ease gradually—not return to zero. Plan for:
- 5–6% as the new “low”
- 7–8% as normal
- Occasional spikes higher
Underwrite for this reality, or face a harsh correction.
Williams Capital Advisors navigates high-rate environments through creative structuring, alternative capital sources, and realistic underwriting. We’ve closed deals others called impossible. In challenging markets, creativity beats capital.
Contact Williams Capital Advisors today: (213) 880-8107 | francisco.Williams@williamscap.ai | williamscapitaladvisors.com
When traditional financing fails, creative solutions succeed.
