Financing shapes outcomes long before operations do
Many investors obsess over purchase price.
However, debt terms often decide whether equity wins or bleeds.
Because of that, smart underwriting starts with financing, not after it.
Why Debt Matters More Than the Asset
A strong property cannot outrun bad financing.
Conversely, disciplined debt can rescue a mediocre deal.
Interest rates, amortization, and covenants quietly control cash flow.
Therefore, equity returns respond first to debt structure, not rent growth.
Leverage Changes Risk Before It Changes Yield
Leverage amplifies results in both directions.
At moderate levels, debt boosts equity efficiency.
Yet, as leverage climbs, volatility accelerates faster than returns.
As a result, the same asset can feel conservative or dangerous depending on its capital stack.
The Federal Reserve highlights how interest rate cycles directly affect commercial real estate risk.
https://www.federalreserve.gov/econres/notes/feds-notes.htm
Rate Structure Sets the Tone Early
Fixed-rate debt offers predictability.
Floating-rate debt offers flexibility.
However, floating structures demand discipline.
Rate caps, extension fees, and refinancing assumptions shape downside exposure.
According to CBRE, floating-rate loans have driven most equity distress since 2022.
https://www.cbre.com/insights/books/us-real-estate-market-outlook
Thus, rate choice often defines survival during market shifts.
Amortization Quietly Eats Cash Flow
Many models underestimate amortization drag.
Shorter amortization increases principal paydown.
At the same time, it reduces distributable cash.
Because IRR penalizes early cash flow loss, aggressive amortization can lower equity returns even when long-term value improves.
Understanding that tradeoff separates operators from spreadsheet optimists.
Covenants Rewrite the Exit Plan
Covenants feel harmless until they activate.
Debt service coverage ratios tighten flexibility.
Cash sweep triggers trap distributions.
Extension tests force capital infusions.
Consequently, lenders gain control precisely when equity needs it least.
Freddie Mac underwriting guidelines show how covenant pressure escalates during value-add execution.
https://mf.freddiemac.com/underwriting
Refinancing Assumptions Create Hidden Risk
Many deals depend on a clean refinance.
Sponsors assume lower rates, higher NOI, and tighter spreads.
Markets rarely cooperate on schedule.
If rates rise or values soften, refinance proceeds shrink.
Then, equity faces dilution or forced sales.
That scenario has played out repeatedly across recent multifamily cycles.
Financing Strategy Changes by Market
Debt behaves differently across regions.
In growth corridors, lenders tolerate execution risk.
In mature markets, they demand stability.
For example, major Bay Area developments continue to influence lender appetite and loan structure.
Internal link suggestion: market-driven debt risk using “Bay Area development financing impact”
https://temblog.org/the-new-bay-area-5-mega-projects-reshaping-the-real-estate-landscape-in-2025/
Ignoring that context leads to mismatched capital stacks.
Distress Exposes Weak Debt Instantly
When sellers face pressure, debt terms dominate negotiations.
Buyers focus less on upside.
Instead, they analyze assumption resets and lender flexibility.
In forced-sale situations, conservative financing often wins over aggressive pricing.
Internal link suggestion: distressed deal structuring using “selling under financial pressure”
https://temblog.org/sell-your-home-fast-gilroy-3/
Liquidity always beats leverage during stress.
How Experienced Investors Underwrite Debt First
Seasoned investors flip the process.
They model debt downside before projecting equity upside.
They stress interest rates, extension costs, and exit timing.
Only after debt survives do they trust projected returns.
That order prevents false confidence.
A Better Question for Equity Partners
Instead of asking for projected IRR, investors should ask one thing.
What happens if debt terms tighten.
If the answer relies on perfect execution, the deal carries more risk than advertised.
Strong deals remain functional even when financing turns unfriendly.
Final Perspective
Financing does not support the deal.
Financing is the deal.
Debt terms shape cash flow, control timing, and dictate exits.
Equity returns simply react.
Underwrite financing with the same rigor as the asset, and returns follow.
