As many borrowers have learned since the recent days of low interest, leverage is not always positive, as when ROE moves directionally lower than ROA. There is less value coming in. That causes two problems that are showing up for many multifamily investors. One, when net operating income (NOI) cannot cover the debt payments, then there is a debt service coverage ratio (DSCR) of less than one. The property cannot pay its keep. This becomes thornier when other cost like insurance, utilities, and taxes keep growing, decreasing NOI. The second problem is that equity investors can become ever more reliant on property value appreciation for returns. “Since multifamily properties typically trade at lower cap rates given the perceived safety, the margin of error is low in a rising rate environment and becomes exacerbated when dealing with floating rate debt,” Wegman wrote. When interest on the debt climbs, NOI falls as does DSCR.