In this episode of the Ironclad Underwriting Podcast, Jason Williams and Frank Patalano continue their series on real estate financing by breaking down one of the most critical components of any deal: interest rates. They explain the differences between fixed and floating rate debt, how floating rates are tied to indexes like SOFR, and why rate caps have become such an important risk management tool. The conversation also explores how investors can stress test interest rate risk and what passive investors should ask sponsors before investing in a deal.

Topics Covered

• How fixed and floating interest rates work in commercial real estate loans
• The role of SOFR and other indexes in determining floating rates
• How rising interest rates impacted investors between 2021 and 2025
• What rate caps are and how they protect investors from rising rates
• Why rate caps can cost hundreds of thousands or even millions of dollars
• How lenders may require escrow accounts to cover future rate caps
• How to stress test deals to understand interest rate risk
• Questions passive investors should ask about debt structure before investing
• When floating rate debt may make sense depending on the investment timeline

Quotes

• “Floating rates might look cheaper on the front end, but you’re taking on uncertainty about what happens on the back end.”
• “The key to managing interest rate risk is stress testing your deal and understanding exactly when your property stops cash flowing.”

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