Commercial Real Estate Financing 101 (Beginner Guide)
Learn how commercial real estate loans work, including DSCR, LTV, debt yield, fixed vs floating rates, and beginner financing risks.
Why Financing Matters More Than Beginners Expect
Two identical properties can produce very different outcomes depending on financing.
Debt can:
amplify returns
or destroy a deal if misused
The 3 Metrics Lenders Care About
1) DSCR (Debt Service Coverage Ratio)
DSCR = NOI ÷ annual debt payments
A DSCR of:
1.25x means NOI is 25% higher than debt payments
Higher DSCR = more cushion.
2) LTV (Loan-to-Value)
LTV = loan amount ÷ property value
Lower LTV:
reduces risk
often means lower returns but higher safety
3) Debt Yield
Debt yield = NOI ÷ loan amount
This tells lenders:
how quickly they could recover capital if they took the property
Fixed vs Floating Rates (Beginner View)
Fixed Rate Debt
predictable payments
lower risk
often preferred for beginners
Floating Rate Debt
variable interest rate
higher risk
often requires rate caps
more sensitive to market changes
Common Beginner Financing Risks
over-leveraging
assuming refinancing will be easy
ignoring loan maturity risk
relying on aggressive rate assumptions
CTR Capital View on Debt
Debt should:
protect the downside
allow flexibility
never force a bad decision
HI@CTR.PM >