Glossary term
Leverage
Leverage means using borrowed money to buy a property. It can raise returns when a property performs well and increase losses when it does not.
Leverage is the use of debt alongside your own cash to buy real estate. A common way to measure it is loan-to-value, or LTV, which is the loan amount divided by the property's value. A $7,000,000 loan on a $10,000,000 property is 70 percent LTV.
When a property earns more than the cost of the loan, leverage can lift the return on the cash you invested. When income falls short, the loan payment still comes due, and the same debt that boosted returns can strain cash flow.
Lenders limit leverage with rules about LTV and debt coverage. Owners balance the upside of a higher loan against the safety of a lower one, especially when interest rates or rents are uncertain.
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