If you’ve been watching the real estate market, you know that things have changed a lot over the past two years. Interest rates are up, lenders are more cautious, and the way we finance deals has shifted.
If you’re a passive investor, understanding these changes is key to making smart decisions. In this post, we’re going to break down why your loan matters more than ever, how to assess risk-adjusted returns, and what you should be looking for in today’s lending environment.
The Big Problem: How Do You Finance Deals in This Market?
A couple of years ago, it was a lot easier to get loans for multifamily deals. Banks were handing out high-leverage loans, sometimes up to 80% loan-to-value (LTV), plus construction dollars. Interest rates were near zero, and financing was cheap.
That meant investors could get in with less equity, complete their projects, and refinance into a more stable loan later.
Fast forward to today, and it’s a completely different story. Lenders are pulling back, requiring more equity upfront. The leverage is lower—on our latest deal, we had a 65% LTV, which meant we had to raise more capital.
No construction dollars were included, so we had to fund that ourselves. But that came with an upside – a lower mortgage payment and less risk. The downside? It’s harder to get deals done because your equity doesn’t go as far.
So the big question is: how do you navigate this new lending environment and still make solid investment decisions?
The New Lending Landscape and What It Means for Investors
The loan product you choose can make or break your deal. In today’s market, we’re seeing a shift toward more conservative financing options. Here are some key takeaways from what’s happening:
Fixed-Rate vs. Variable-Rate Loans
A couple of years ago, variable-rate loans looked great. They offered high leverage, included construction funds, and were structured for short-term plays. But as interest rates spiked, those same loans became a nightmare for many investors. Payments doubled—or even tripled—making it hard to cover debt service.
Today, fixed-rate loans are the safer bet. They provide stability because you know exactly what your payments will be. No surprises. No panic when rates go up.
On our latest deal, we locked in a fixed-rate loan to minimize risk, and it’s one of the best decisions we could have made.
Loan-to-Value (LTV) and Its Impact on Risk
The lower your LTV, the lower your risk.
With our 65% loan-to-value, we have a lot of equity in the deal. That means if things go sideways, we have more cushion. Compare that to an 80% LTV loan from a few years ago—those deals are much more vulnerable when markets shift.
LTV is simply the percentage of a property’s value that is financed by a loan. A lower LTV means that more equity is invested upfront, reducing the lender’s risk and increasing the financial stability of the deal. Conversely, a higher LTV means less equity is required, but it increases the risk for both the investor and the lender if market conditions change.
If lenders start increasing LTVs again (say back to 75% or 80%), pricing on multifamily deals will rise because investors can borrow more money. But higher leverage also means higher risk.
The higher the LTV, the more debt service payments eat into cash flow, leaving little room for unexpected expenses or economic downturns. A deal with a high LTV can quickly become distressed if interest rates rise or property values decline. You have to strike the right balance between maximizing leverage and minimizing risk.
Understanding Risk-Adjusted Returns
Not all 15% returns are created equal. You have to look at the underlying risk. A deal with an 80% LTV, variable-rate loan, and aggressive rent growth projections carries far more risk than a deal with a 65% LTV, fixed-rate loan, and conservative underwriting.
When you’re looking at an investment, ask yourself: What’s the risk-adjusted return? A higher return isn’t always better if the risk is sky-high.
How to Evaluate a Deal in Today’s Market
If you’re a passive investor, here are some questions you should ask your multifamily operator before making a decision:
- Loan Type: Is it fixed or variable? Fixed-rate is safer right now.
- LTV: The lower, the better. Higher leverage = higher risk.
- Reserves: Are they included? If not, why?
- Underwriting Assumptions: Are rent growth projections realistic? Are vacancy assumptions conservative?
- Exit Cap Rate: Is it conservative, or is the operator assuming cap rates will go down? (Big mistake.)
The reality is, multifamily investing is all about managing risk. If you get your financing wrong, you can be in for a rough ride. But if you structure your loan correctly, plan for the unexpected, and understand the true risk-adjusted return, you can make great investments even in today’s market.
We’re in a period of adjustment, but that doesn’t mean there aren’t great opportunities out there. The key is to be smart about your financing, build in conservative assumptions, and focus on deals that make sense even in a tougher lending environment.
If you’re a passive investor, ask the right questions. If you’re an operator, communicate your strategy clearly. And if you’re looking for solid multifamily deals, we’d love to chat. Visit us at NighthawkEquity.com to learn more about our latest opportunities.
