Why Floating Rate Loans Are the Silent Killers in Multifamily Real Estate
Floating rate loans quietly choke cash flow and turn solid multifamily deals into financial disasters.
By Mark Kenney I Think Multifamily
In a booming market, floating rate loans can look like the perfect financing tool — flexible, lower initial interest rates, and a quick close. But when the market turns? They become one of the fastest ways to bleed cash and collapse a deal.
We’ve seen it firsthand at Think Multifamily and documented it in the book Multifamily Syndication Collapse — where deals didn’t fall apart because of bad assets, but because of bad debt structures.
Let’s break down why floating rate loans have become one of the biggest threats in multifamily real estate — and what you should do instead.
What is a Floating Rate Loan?
Floating rate loans (also called adjustable-rate mortgages) are loans where the interest rate changes over time. Unlike fixed-rate loans, these are tied to a financial benchmark like SOFR (Secured Overnight Financing Rate) or LIBOR, plus a spread.
📈 Pro: You might start with a lower interest rate.
🔥 Con: That rate can spike dramatically — sometimes doubling or tripling — depending on the market.
In a stable environment, floating rates might make sense for short-term repositioning deals. But in a volatile market like 2023–2025? They’re a ticking time bomb.
Real-World Fallout: The 2023–2025 Crisis
During 2023 and 2024, many multifamily operators faced a harsh reality: floating rate loans that had once looked brilliant became unaffordable overnight.
Some saw their interest payments double in under a year.
Others were forced into cash management or loan defaults.
📖 From Multifamily Syndication Collapse:
"One property was cash flowing strong until their rate jumped from 4.5% to 9.2% in 14 months. Their monthly debt service nearly doubled — and they hadn’t raised enough reserves to cover the gap. Within 90 days, they were forced into default."
These weren’t bad properties. They were properties with bad debt.
Why Syndicators Fall for the Trap
📖 On paper, floating rate loans look attractive:
Lower initial rates
Easier to qualify
Faster to close
⛓️ But the real trap is the assumptions operators make:
"We’ll refinance before rates rise." ⏳💸
"The market will keep appreciating." 📈🌅
"We have enough reserves to ride it out." 🏦🛟
🛑 Reality Check:
📌 Refi windows closed when valuations dropped.
📌 Reserve requirements increased as lenders got nervous.
📌 Loan covenants were triggered, and cash flow was trapped.
At Think Multifamily, we’ve reviewed dozens of deals where the loan terms — not the operations — sank the ship.
The Misunderstood Risk of Rate Caps
Some investors rely on rate caps to mitigate floating rate risk. These are insurance products that limit how high your interest rate can go.
🚩 Show the trap unfolding step by step:
🔹 Year 1–2: Rate cap provides relief.
🔹 Expiration: Renewal costs surge.
🔹 2021–2023: Prices climb 3,400%.
🔹 Outcome: Deals once profitable become distressed.
This makes the risk feel inevitable and progressive.
📖 From the Multifamily Syndication Collapse Book:
"We had a cap. Didn’t matter. It expired. The new one cost 10x more — and we couldn’t afford it. That single cost flipped our deal from profitable to distressed."
Bottom line: rate caps offer temporary relief. But they aren’t a long-term strategy unless backed by a clear, conservative plan.
What Smart Investors Do Instead
Floating rate loans aren’t evil — but they demand expertise, margin, and planning.
Here’s what we recommend at Think Multifamily:
✅ Use fixed-rate, long-term debt when possible — especially for value-adds in uncertain markets.
✅ Raise more capital upfront to handle debt service increases, reserve replenishments, and refi delays.
✅ Stress test your deal at rates 2–3% higher than today.
✅ Match your loan term to your business plan. If you’re planning to hold 5 years, don’t use a 2-year bridge loan with no exit flexibility.
✅ Understand your loan docs and covenants. Many syndicators got caught by clauses they never read.
✅ Know your worst-case DSCR. If your deal dips below 1.0, can you survive?
Final Takeaway: Debt Isn’t Just a Tool — It’s a Risk Multiplier
A deal that only works at today’s rate is already broken. Floating rate debt isn’t the problem — misusing it is.
Before you take on any loan, ask: Can this deal survive if rates rise, valuations fall, or refis disappear?
If the answer is no — you don’t have a strategy. You have a gamble.
🎯 Ready to structure your next deal the right way?
📍Download our 7 Critical Steps To Buying Your 1st Apartment Building
📍Or use the Smart Apartment Analyzer to stress test your next deal
“The riskiest part of your deal isn’t the property — it’s the paper you sign on closing day.” — Mark Kenney