SS104: What is SOFR?

Описание: Welcome to Strategy Saturday; I’m Charles Carillo and today we’re going to be discussing What is SOFR.
The Secured Overnight Financing Rate (SOFR) is an alternative to the London Interbank Offered Rate (LIBOR). In this episode, Charles breaks down what is SOFR and why is it replacing LIBOR.

TALKING POINTS
➡ In Episode SS51; I discussed the London Interbank Offered Rate (LIBOR), the history and how it is used. In this episode we are going to talk about the Secured Overnight Financing rate (SOFR). SOFR was established as an alternative to LIBOR.
o SOFR is a benchmark that lenders utilize to price loans for consumers and businesses. As the name states, is based on the rates that large financial institutions pay each other for overnight loans. SOFR is the average rate at which financial institutions can borrow US dollars overnight while posting US Treasury bonds as collateral.
o SOFR takes into consideration actual lending transactions between institutions, unlike LIBOR that was based on rates that financial institutions SAID they would offer; done via a survey.
o SOFR is a more accurate indicator of borrowing costs.
➡ Why is SOFR important to real estate investors?
oReal estate investors who are considering adjustable-rate mortgages, floating rate bridge loans etc. should be aware and familiar with SOFR.
oThese loan products will be based off of SOFR; with a spread above SOFR of typically 1.25%-4%; depending on the strength of the collateral and the borrower. For example; if SOFR is 3% and the spread is 2%; your interest rate will be 5%. Like with any loan; there are a number of one-time fees that can vary per lender.
➡ How to protect yourself when utilizing floating debt?
o Get a rate cap; interest-rate caps are contracts that firms buy to protect themselves from sharp increases in rate benchmarks. Some floating rate lenders require their borrowers to purchase them; which will greatly reduce the chance of customers defaulting on their loans.
o Get fixed rate debt instead of a floating rate. Fixed-rate mortgages are the most risk-averse; but if you are anticipating a short hold period; fixed-rate prepayment penalties can be expensive. There is however the ability with most commercial mortgages to have the new buyer assume the mortgage. However, if interest rates have fallen during the time you have owned your property; your buyer will most likely not want to assume it and if your mortgage has yield maintenance; a pre-payment penalty that gets more expensive if interest rates drop; your pre-payment penalty will be larger.
o The main benefits of variable debt are that it is able to be paid back early without any type of penalty and during short hold periods; variable debt costs less.
o Floating-rate mortgages were maligned in the past with irresponsible borrowing; but when you calculate the risks alongside your business plan; it may be the best choice. Not all real estate investors are long-term investors and floating-rate debt provides more flexibility. You can always refinance into fixed-rate debt after you have completed repositioning the property.
o Don’t just look at the rate when you are getting a commercial mortgage; also review and take into consideration the other fees; especially the pre-payment penalty.
o Floating rate debt is not for new investors; make sure to weigh all of the pros and cons prior to entering into any lending contract.

Connect with the Global Investors Show, Charles Carillo and Harborside Partners:
◾ Setup a FREE 30 Minute Strategy Call with Charles:
http://ScheduleCharles.com
◾ Learn How To Invest In Real Estate: https://www.SyndicationSuperstars.com/
◾ FREE Passive Investing Guide: http://www.HSPguide.com
◾ Join Our Weekly Email Newsletter: http://www.HSPsignup.com
◾ Passively Invest in Real Estate: http://www.InvestHSP.com
◾ Global Investors Web Page: http://GlobalInvestorsPodcast.com/
◾ Global Investors Facebook:   / globalinvest.  .
◾ Global Investors Instagram:
  / globalinves.  .
◾ Charles Carillo LinkedIn:   / charleskc.  .
◾ Foreign Investing in US Real Estate Facebook Group:
  / forei.  .

#GlobalInvestors #CharlesCarillo #SOFR