real estate debt selection is the focus of this guide for passive real estate investors. First, it highlights the main idea behind the topic. It also outlines the risks and questions worth reviewing. As a result, you can approach the discussion with a clearer framework.
What to know about real estate debt selection
Core ideas for real estate debt selection
An interesting piece of information was brought to our attention when we recently toured a potential deal. The seller had over $4.4M in a prepayment penalty for the remaining years of their 10-year fixed note. In addition, the reason for the large prepayment fee is yield maintenance.
Yield maintenance means the borrower pays the lender for any interest owed (less what the lender can re-lend the money for) for the duration of the loan.
Risks and tradeoffs
For example, if an apartment was purchased 3 years ago at 5.5% interest fixed for 10 years. Today’s rate is 3.5% interest fixed for 10 years then the borrower would owe 2% interest to the lender for the remaining 7 years.
Moreover, we did not make an offer on the property. I believe the seller will have difficulty finding a buyer because of their current debt situation.
Questions to ask
Having the right financing per project is extremely important. The apartment lending industry is very competitive right now with low fixed rate longer-term debt (called fixed) and low variable rate shorter-term debt (called bridge.) To avoid “debt calamities,” when we evaluate an investment property. In addition, we make sure we use the best financing option.
In the table below, I have laid out how our group views both financing options.
Key takeaways for real estate debt selection
- Start with the goal and timeline that fit your wider financial plan.
- Next, review the assumptions, risks, fees, and possible outcomes.
- Finally, compare the opportunity with other ways to use your capital.
Put real estate debt selection in context
Practical next steps
Every investment decision depends on the investor, the deal, and the market. Therefore, use the ideas above as a starting point for deeper due diligence. Review source documents, ask direct questions, and seek qualified advice when needed. For more guidance, explore our passive real estate investing education.
A clear review of real estate debt selection
real estate debt selection deserves a clear and practical review. These short checks can support a more informed decision.
- Start with a clear goal.
- Next, define the time horizon.
- Review each key assumption.
- Compare the likely outcomes.
- Test a less favorable case.
- Ask who controls each decision.
- Confirm the fees and incentives.
- Study the market and the deal.
- Check the supporting documents.
- Look for clear communication.
- Compare other choices.
- Keep the full plan in view.
- Write down the main risks.
- Review the source of returns.
- Check the exit assumptions.
- Understand the tax questions.
- Consider the need for liquidity.
- Match the choice to your goals.
- Ask direct follow-up questions.
- Confirm the reporting process.
- Review the operating plan.
- Check the team’s experience.
- Compare the best and worst cases.
- Keep expectations realistic.
- Use qualified advice when needed.
- Document the final decision.
- Review the decision over time.
- Watch for changing conditions.
- Stay focused on the long term.
- Finally, act with a clear reason.