Real estate is an excellent investment, but you can never be forced to sell it at the wrong time. That principle has guided every financing decision I’ve made over the past 30 years, and it’s never been more relevant than today.
Two of our recent acquisitions came directly from this reality. Both were amazing developments—high-quality Class A properties built in 2023 and 2024. Both had everything going for them except one critical flaw: their debt structures dictated premature sales. Despite being brand-new assets with strong fundamentals, the owners’ leverage decisions forced them into distressed dispositions.
This isn’t an isolated phenomenon. According to the Mortgage Bankers Association, 20% ($957 billion) of $4.8 trillion of outstanding commercial mortgages will mature in 2025—with multifamily representing a significant portion of these maturities. JLL reports that $3.1 trillion of real estate assets globally have maturing debt by the end of 2025, with living/multi-housing accounting for 25% of these maturities. More telling is what’s happening with debt fund financing: according to MBA data, CMBS delinquency rates across all property types reached 5.78% in Q4 2024, representing a significant increase from previous years.
The secret to avoiding this fate isn’t complex: secure long-term, low-leverage, non-recourse, high-quality debt. At PEM, we focus exclusively on agency debt—Fannie Mae, Freddie Mac, and HUD. These are long-term, active lenders that share our conservative approach. We don’t use preferred equity or short-term debt. We’re long-term holders, allowing real estate to grow over time as it was meant to, rather than gambling on timing or hoping for abnormally aggressive rent growth.
The Agency Advantage: Why We Choose Fannie, Freddie, and HUD
Agency debt isn’t just about competitive rates—it’s about alignment, stability, and terms that support long-term wealth creation.
Consider the current lending landscape. The Federal Housing Finance Agency (FHFA) has set 2025 lending capacity at $146 billion combined for Fannie Mae and Freddie Mac, with $73 billion allocated to each. These aren’t fair-weather lenders—they’re permanent capital sources designed to provide liquidity through market cycles.
Agency loans offer structural advantages that debt funds simply can’t match: non-recourse terms, 30-90 day rate locks, full assumability, and leverage ratios that make sense. More importantly, agency lenders underwrite conservatively because they’re holding the risk long-term, not packaging it for sale.
With lower leverage, you can often secure interest-only payment options, providing additional cash flow flexibility during lease-up periods or market volatility. This isn’t financial engineering—it’s prudent capital structure design that recognizes real estate’s cyclical nature.
The difference becomes obvious when you look at current market performance. As I discussed in our previous analysis of the evolution of debt funds in multifamily, the regulatory changes that created opportunities for non-bank lenders also brought risks that are hitting home now.
But theory is one thing—living through market stress is another. Let me show you what conservative leverage actually looks like when the pressure’s on.
Real-World Stress Testing: How Conservative Leverage Performs Under Pressure
Market cycles aren’t theoretical exercises—they’re live stress tests of your capital structure decisions. We’ve lived through this repeatedly, most recently from 2022 to present.
We purchased several assets late in the last cycle, but we limited our debt to 55% loan-to-value ratios. As the market softened and cash flows compressed, these properties remained stable and secure. The assets are still less than five years old and will be excellent long-term investments precisely because we didn’t stretch on leverage.
According to CBRE Research, the average prime multifamily cap rate increased by 155 basis points to 4.92% from Q1 2022 to Q3 2023, representing significant value compression. Properties with aggressive leverage faced refinancing crises, while our conservative approach provided the staying power to weather the cycle.
The importance of financial cushions became tangible during a series of hailstorms in Dallas and Georgia. Neither individually triggered insurance claims, but over several years, both roofs—less than 10 years old—required full replacement. We negotiated payment schedules with the roofing contractors—25% down and the balance over six months. Because we maintained excess cash flow through lower leverage, we replaced both roofs without risking asset protection or creating future problems.
Now, what happens when you don’t have that capacity? When your debt structure leaves no room for error? That’s when you fall into what I call the collection cycle trap—and it’s uglier than most people realize.
Many people underwrite assets to ideal scenarios, but having appropriate debt and cash reserves is critical for long-term stability and value preservation. PEM has learned many lessons over the years, and living collection cycle to collection cycle is never a sound strategy for wealth building or asset protection.
The Hidden Trap: Living Collection Cycle to Collection Cycle
Many operators underwrite properties to perfect scenarios, but real estate is an operating business with dynamic challenges. I’ve watched too many investors fall into what I call the collection cycle trap, and it’s a revealing glimpse into what inadequate capital structure really costs.
Here’s what that looks like in practice: accounts payable climbs month after month. You manage cash flow by paying the lender first—along with taxes and insurance—then payroll, then you’re forced to allocate whatever remains among operating expenses. Deferred maintenance goes undone or gets done poorly. After several months of this pattern, capital calls become necessary to protect the asset.
According to the National Apartment Association’s operating expense data, multifamily properties typically require significant reserves for proper maintenance and operations. Industry benchmarks suggest maintaining reserves equivalent to several months of operating expenses to handle unexpected costs and capital improvements. When leverage is too high, these essential reserves get squeezed, creating a downward spiral of deferred maintenance and declining property condition.
Many people underwrite assets to ideal scenarios, but having appropriate debt and cash reserves is critical for long-term stability and value preservation. PEM has learned many lessons over the years, and living collection cycle to collection cycle is never a sound strategy for wealth building or asset protection.
Current Market Validation: Agency Debt vs. the Alternatives
Today’s market provides stark validation of conservative debt strategies. The delinquency data tells the story better than any theory.
According to MBA’s Q4 2024 Commercial Delinquency Report, agency debt maintains remarkably low delinquency rates across their portfolios: Fannie Mae at 0.57% and Freddie Mac at 0.40% (primarily multifamily loans), compared to CMBS at 5.78% (all property types) and commercial banks at 1.26%.
Most revealing are the delinquency rates for loans originated through collateralized loan obligations (CLOs)—structured products that pool commercial real estate loans from non-bank lenders, primarily debt funds. CLOs represent the higher-leverage, shorter-term financing that many investors pursued during the recent cycle. According to industry reports, CLO delinquency rates have increased significantly, with multifamily properties representing a substantial portion of the distressed loans, and some issuers reporting overall distress rates exceeding 30% of their portfolios.
The performance gap isn’t coincidental. Agency lenders’ conservative underwriting and lower loan-to-value requirements create resilient capital structures. Their focus on high-quality assets and longer-term holds aligns with fundamental real estate economics rather than fighting against them.
Many investors who sought higher leverage during the recent cycle used debt funds to increase borrowing capacity with shorter terms. When the market softened, they got caught with impaired values because their loan terms weren’t suited to changing conditions.
The Long-Term Wealth Building Case
This brings me to a question investors always ask: why accept lower initial returns when higher leverage could juice the numbers?
Here’s the reality: real estate is a long-term game. You need to approach it that way, not look for guaranteed monthly returns like some kind of bond. When you take care of the real estate over time—and I always say this—it will take care of you.
Class A multifamily properties, in particular, provide stable, long-term returns with relatively lower risks. These properties attract residents with steadier jobs and higher credit scores, while also drawing institutional buyers who provide deeper exit liquidity when the time comes to sell.
Consider a practical example: a $80 million Class A multifamily purchase with conservative leverage can generate substantial cash flow over a 10-year hold, plus significant appreciation, yielding strong total returns. Even if cap rates expand unfavorably, the investment remains profitable due to the cash flow cushion from conservative leverage.
The mathematics favor patience over leverage. According to CBRE data, multifamily properties have shown consistent rent growth over the past decade, demonstrating that quality assets appreciate consistently when held through cycles.
Conservative leverage also provides optionality during market dislocations. While highly leveraged competitors face refinancing pressure, conservative structures enable opportunistic acquisitions when others are forced sellers. This cycle-responsive approach, as outlined in our investment philosophy, allows superior risk-adjusted returns without requiring perfect execution.
But this approach only works if you have the discipline to stick to it—especially when everyone around you is chasing higher returns with more leverage. Which brings me to our most fundamental rule.
Why We Walk Away From “Good” Deals
Here’s the thing: we do not look at any deal with aggressive leverage. Period.
This isn’t about being risk-averse—it’s about understanding what real risk looks like. I’ve seen too many operators confuse speculation with investment. Real estate will deliver excellent returns when you structure it right, but those returns come from operational performance and market appreciation over time, not from financial engineering tricks that look good on spreadsheets.
With agency debt, the underwriting is conservative and loan-to-value ratios are appropriate. These lenders focus on high-quality assets and work with sponsors who understand long-term value creation. The alignment creates sustainable capital structures that support rather than threaten property performance.
The current market environment demonstrates why this matters. With nearly $1 trillion in total commercial real estate loans maturing in 2025, including substantial multifamily exposure, properties with conservative debt structures will have significantly more options than those requiring perfect execution for refinancing.
Building Wealth the Right Way
Real estate cycles are inevitable, and operations are never perfectly predictable. You can budget for routine maintenance and expected vacancy, but hailstorms, equipment failures, and market shifts will test your capital structure regularly.
The secret isn’t avoiding these challenges—it’s building financial capacity to handle them without compromising long-term objectives. Conservative leverage creates this capacity while aggressive leverage eliminates it.
Over three decades, I’ve learned that wealth building in real estate requires patience, appropriate capital structures, and the discipline to walk away from deals that require perfect execution. The goal isn’t to maximize returns on any individual investment—it’s to build sustainable wealth through consistent performance across multiple cycles.
When you structure debt conservatively, maintain adequate reserves, and focus on quality assets in growing markets, real estate becomes a reliable wealth-building tool rather than a speculative gamble. That’s the difference between investors who build generational wealth and those who get forced to sell at the wrong time.
As we’ve seen throughout this cycle, the market rewards patience and punishes speculation. Conservative leverage isn’t about limiting upside—it’s about ensuring you’re still in the game when opportunities arise and avoiding the fate of those two recent sellers who built excellent properties but couldn’t hold them long enough to realize their value.
Real estate will take care of you, but only if you take care of it first. Conservative debt management is how we honor that relationship.
Have questions about navigating today’s lending environment? We’re always happy to share what we’ve learned from 30 years of multifamily cycles. Let’s talk.
Paul Mashni is the Founder and CEO of Professional Equity Management (PEM), a vertically integrated real estate investment firm specializing in multifamily properties. With over 30 years of experience and more than 25,000 apartment units acquired, Paul has successfully navigated five downturns while maintaining an average IRR of 20%+ since inception. His investment philosophy is guided by the principle that it’s “better to sell a year too early than a day too late.” His background in accounting and finance, along with his law degree from Wayne State University, informs PEM’s disciplined approach to investments. Paul holds a Bachelor of Science in Accounting and an MBA in Finance from Michigan State University.
