Shafiq Hirani explains how to choose between fixed and floating apartment loans by finding your breakpoint: the interest rate where your debt-service coverage ratio hits the lender's minimum. In a $2.72M loan example, the breakpoint is 6.5%, leaving only 75 basis points of cushion before the loan breaches its covenant. Pick fixed if you need certainty; pick floating only if you're comfortable with that limited room.
Chapters
If a lender has offered you a floating rate that looks cheaper than the fixed, and you are trying to work out whether that is a gift or a trap, I have a solution. There is one number that answers it, and most owners never run it. I'm Shafiq Hirani, MBA, CCIM. I have taken both structures on my own buildings, and I can tell you the right answer is not the same for every owner. But there is a right way to decide. Like and subscribe if this is useful. It puts this in front of the next owner facing the same choice. Let's go. A fixed rate locks your payment for the whole term. A floating rate moves with an index, usually SOFR plus a spread, and it resets, often monthly. The floating rate almost always starts lower. That is the entire appeal. But here is what you are actually buying. With fixed, you are buying certainty. With floating, you are selling certainty in exchange for a discount today. Let me put real numbers on it, using the building we have been working with all series. Lender income of $275,200 and a loan of $2.72 million. At a fixed 6.5%, your annual payment is about $220,000, and your coverage ratio sits right at 1.25. Now say the lender offers floating at 5.75%. Your payment drops to about $205,000. Your coverage improves to 1.34. That is real money, roughly $15,000 a year. But floating rates float. If that rate moves up 200 basis points to 7.75%, your payment goes to about $246,000, and your coverage ratio falls to 1.12. And there is the number that actually decides this. At 1.12 coverage, you are below what almost every lender requires. You would not be in default on your payments, you can still make them. But you would be in a very weak position at your next refinance, and depending on your loan documents, you may have tripped a covenant. So the question is not, is floating cheaper today? Of course it is. The question is, at what rate does my building stop covering its debt at the level my lender requires? On this building, that breakpoint is right around 6.5%. Which means an owner taking floating at 5.75% has about 75 basis points of room. That is not very much. If you are comfortable with that, floating may be right. If that makes you uneasy, you have your answer. Do not choose between fixed and floating by comparing today's rates. Choose by finding the rate at which your building stops covering its debt. Then ask honestly how much room you have. Certainty has a price. Sometimes it is worth paying. If that gave you a clearer way to decide, like and subscribe. And tell me in the comments, are you fixed or floating right now, and how much room do you actually have? That is a conversation worth having out loud. The Refinance Navigator Checklist includes the worksheet to find your own breakpoint. Link below or scan the code. Next is the biggest decision most apartment owners ever make. Do you pull the cash out? Or do you sell? The numbers are not close, and they surprise almost everyone. I am Shafiq Harani, MBA CCIM. I have taken both structures on my own buildings, and I can tell you the right answer is not the same for every owner. But there is a right way to decide. Like and subscribe if this is useful. It puts this in front of the next owner facing the same choice.
