In a near zero interest rate environment, floating-rate debt and higher leverage can feel like a good choice. When debt is virtually free and you’re focused on maximizing returns, leverage is the way to do it.
But the risk is always there, even when it doesn’t feel like it. When rates rise quickly, debt service moves just as fast. Coverage disappears. The leverage that once juiced returns suddenly eliminates flexibility.
We saw this play out in real time. Even when property performance improved from acquisition, rising debt costs overwhelmed cash flow, cap rates expanded, and you’re suddenly underwater. Refinancing became difficult. Selling didn’t work. Viable exit paths narrowed quickly.
What works in a low-rate environment can become catastrophic as rates spike. At extreme leverage, small moves in value can erase equity just as quickly as they create it. At 90% LTV, a 10% increase in value doubles your equity. A 10% drop wipes it out.
From a risk-adjusted perspective, use fixed-rate debt whenever you can. And in real estate, more conservative leverage, often closer to 50–60% LTV. It gives you room to survive when the market turns.
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