Income Property Real Estate Agency

Understanding the percentages.

The increase to the cost of borrowing funds from the lenders in 2013 led to an important change of the lending for our multi-family listings. When the five-year CMHC-insured loans were running at 2.5 to 2.6% in early 2013, the most aggressive cap rates that we saw in our sales were at 5.75%. This depended on whether the property was well-maintained, well-located, and able to command above-market rents.

However, this changed significantly in the summer and fall of 2013, and we are seeing the consequences now. Although the interest rates showed a slight increase, the cap rates used by the lenders on CMHC-insured loans rose to 6.25%. This 8.7% increase to the cap rate caused an 8% decrease in the actual loan amount.

This meant that the loans obtained from lenders by purchasers on the same property with the same numbers observed in early 2013 decreased by 8%, despite the fact that we have not really seen much of a decrease to average sale prices in our market. As a result, buyers need more funds for the down payment on multi-family properties today than they did in early 2013.

In order to illustrate these points, here is a breakdown of the numbers.

Early 2013
Net income = $100,000
Cap rate = 5.75%
Bank evaluation = $1,739,130 loan = 85% = $1,478,260

Net income = $100,000
Cap rate with 8.7% increase = 6.25%
Bank evaluation = $1,600,000 loan = 85% = $1,360,000 (an 8% decrease on the loan on the exact same property)

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