The Leverage Trap — How Too Much Debt Destroys Multifamily Deals

Think Multifamily | Mark Kenney

Leverage Can Build Wealth — Or Wipe It Out

Too much debt can quietly turn a promising multifamily investment into a financial disaster—The Leverage Trap reveals how overleveraging destroys multifamily deals and how smart investors avoid it.

In multifamily investing, leverage is often sold as a superpower. Get more returns with less money. Scale faster. Close bigger deals.

And while debt can be a powerful tool, it also carries sharp edges — especially in a volatile market.

At Think Multifamily, we’ve watched strong operators collapse not because of bad operations, but because they overleveraged their deals.

📖 As Mark Kenney says in Surviving The Multifamily Collapse:

“Debt didn’t just fund the deal. It destroyed it.”

Let’s break down why leverage feels so good on paper — and how to use it wisely so you’re not one interest rate hike away from disaster.

1. Why Leverage Looks So Good (on Paper)

High leverage — especially 80%–85% Loan-to-Value (LTV) — is tempting:

✅ Less equity needed from investors

✅ Higher projected returns (IRR, CoC)

✅ Bigger deals, faster portfolio growth

And yes, leverage can boost gains when everything goes right. But it also magnifies losses when things go wrong.

In short: Leverage amplifies the outcome — not just the upside.

2. What Overleverage Looks Like in Reality

Many operators in the 2021–2023 cycle:

👉 Used high LTV bridge loans

👉 Chose floating rate debt to close faster

👉 Assumed rent growth would cover higher payments

👉 Didn’t raise enough capital for reserves

Then the market shifted: 🔄📉

↗️ Rates spiked

📈 Insurance and taxes surged

📊 Rent growth plateaued

Suddenly, those leveraged-to-the-max deals went from “high potential” to financially bleeding. 💸📉

🧨 Even small disruptions — like a 5% dip in NOI — can cripple a highly-leveraged deal.

3. The Math Behind the Collapse

Let’s say your deal looked great at a 5% interest rate.
But then your floating rate loan resets to 8%.

If your NOI drops by 10%, but your debt service increases by 25%, you’re not just losing margin — you’re in negative cash flow. 🚫💰

📖 From the Book:

“Even deals at 90% occupancy flipped negative overnight. The property didn’t fail — the financing did.”

In many cases, overleveraged deals couldn’t even sell — because the sales price wouldn’t cover the loan balance.

4. Real Case: Good Property, Bad Debt

Mark Kenney shares in book, Surviving The Multifamily Collapse, about a deal that checked all the boxes:

✅ 90%+ occupancy

✅ Clean financials

✅ Positive trends pre-close

But the operator used:

🔻 85% LTV

🔻 Floating bridge debt

🔻 No rate cap strategy

When interest rates surged, 🚀📈 the debt service overwhelmed NOI. 💸📉.

“The asset didn’t fail. The financing did.”

This wasn’t an operational mistake — it was a capital structure error. ⚖️❌📉

5. How to Use Leverage Wisely

If you want to scale sustainably, not just quickly, here’s how we recommend using leverage:

✅ Stay at or below 70% LTV — ideally closer to 60–65% 📊⚖️

✅ Use long-term, fixed-rate agency loans whenever possible 🏦📑

✅ Build 6–12 months of reserves into your capital stack 💰🛡️

✅ Stress test your deal at 2–3% higher interest rates 📈🔍

✅ Underwrite conservative rent growth and expand exit cap rates 🏘️📉

📊 We always ask: Would this deal survive if cap rates rise and NOI stalls for 12 months?

If not, it’s a gamble — not a strategy.

Final Takeaway: Overleverage Is the Fastest Way to Lose a Great Deal

In real estate, capital structure matters as much as the property itself.

Aggressive leverage might impress on paper, but when the market turns — it’s often the #1 reason deals fail.

🧠 Before your next deal:

Join our email list for more great content!

📍Read real collapse case studies and lessons in the Executive Summary version of Surviving The Multifamily Collapse

📍Or get coaching to help structure safer, smarter deals.

“In multifamily, returns are optional. Debt payments are not.” — Mark Kenney