Schedule

The Wrong Debt Can Sink the Right Deal

The Wrong Debt Can Sink the Right Deal

Good Operations Can’t Fix Bad Financing

You can buy in a strong market.

You can execute renovations perfectly.

You can improve occupancy.

But if your debt structure is wrong, the deal can still fail.

Financing is leverage — and leverage magnifies both gains and losses.

Fixed vs Floating: Know Your Exposure

Floating rate loans often offer:

  • Lower initial rates

  • Flexibility

  • Shorter terms

But they expose you to interest rate volatility.

If SOFR rises, your payments rise.

Fixed rate loans offer:

  • Stability

  • Predictable debt service

  • Protection in rising rate environments

Every choice carries trade-offs.

Loan Maturity Risk

What happens when your loan matures?

  • Can you refinance?

  • At what rate?

  • Is your DSCR strong enough?

Short-term loans in uncertain markets create refinancing pressure.

Debt maturity must align with business plan timelines.

Rising Rates & Stress Testing

Ask:

  • What if rates increase 100 bps?

  • Does DSCR remain above lender minimums?

  • Can the property sustain higher payments?

If not, the deal is vulnerable.

DSCR: Your Safety Indicator

Debt Service Coverage Ratio measures:

NOI ÷ Debt Service

If DSCR drops below 1.25–1.30, risk increases.

Healthy DSCR protects against shocks.

When Good Deals Fail

Many failed deals weren’t bad assets.

They were:

  • Overleveraged

  • Short-term financed

  • Rate-sensitive

  • Poorly hedged

Financing structure matters as much as acquisition price.

Smart Debt Strategy

Disciplined sponsors:

  • Match loan term to hold period

  • Stress-test interest rates

  • Avoid overleverage

  • Maintain DSCR buffers

  • Consider rate caps if floating

Debt should support strategy — not threaten it.

Final Thought: Finance Conservatively

Operations drive performance.

Debt determines survival.

Before signing, ask:

  • Is the rate structure safe?

  • Is maturity aligned?

  • Can we handle higher payments?

  • Is DSCR healthy?

Good deals fail because of bad financing — not bad real estate.

📅 Want to structure debt intelligently?
https://ephesusequity.partners/calendar-page/

Share the Post:

Related Posts