Three Ratios, Three Questions
- Loan-to-value (LTV): how large is the loan compared with the value used by the lender?
- Debt-service coverage ratio (DSCR): how much property NOI exists relative to required debt payments?
- Debt yield: how much NOI does the property produce relative to the loan balance?
The Payment Can Change
A fixed-rate loan generally fixes the stated interest rate for a defined period. A floating-rate loan resets using an index plus a spread. A rate cap may limit the index for a period, but caps expire, have terms, and may be costly to replace. Interest-only periods reduce current payments without paying down principal. Amortization gradually reduces principal but requires more current cash.
Maturity Is a Deadline
At maturity, the remaining balance usually must be repaid, refinanced, extended, or addressed through another transaction. Refinancing depends on property performance, value, lender appetite, rates, proceeds tests, and borrower qualifications at that future time. Extension options can require fees, fresh rate caps, minimum DSCR, renovation progress, or other conditions.
Illustrative Stress Test
If annual NOI is $1.2 million and annual debt service is $900,000, DSCR is about 1.33x. If NOI falls to $1.05 million while debt service rises to $1 million, DSCR falls to 1.05x. Very little cash remains before capital needs or reserves, and the loan may approach a covenant threshold.
Stress tests should model combined pressure. Occupancy, expenses, interest rates, renovation delays, and cap rates do not always move one at a time.
What to Remember
- Leverage can amplify gains and losses.
- DSCR measures payment coverage, while LTV and debt yield examine different parts of lender risk.
- Floating rates, cap expirations, and maturity can change an otherwise strong property story.
- Loan documents and downside tests matter more than a headline interest rate.
Questions to Ask
Is the rate fixed or floating?
Request the index, spread, floor, cap strike, cap expiration, and replacement requirements.
What happens at maturity?
Review extension conditions and a refinance analysis using lower NOI, higher rates, and lower value.
What guarantees or covenants exist?
Ask about recourse, carve-outs, reserves, cash management, performance tests, and lender remedies.
This lesson is for general educational and informational purposes only. It is not investment, legal, tax, accounting, retirement-plan, or financial advice and is not an offer to sell or a solicitation to purchase any security. Examples are simplified and hypothetical. Private real estate investments are speculative, illiquid, and involve substantial risk, including possible loss of principal. Rules and individual circumstances vary. Review definitive offering documents and consult your own qualified advisers.