Leverage

Leverage (also called Financial Leverage) is the impact of borrowed funds on the return on an investment.  Leverage is the use of borrowed funds anticipating  that there will be a profit on the money invested as well as on the money borrowed.  The net return on the actual investment will (hopefully) be larger on the cash outlay than if the property was purchased with cash.

 

Leverage maximizes cash flow using borrowed money to finance assets.

 

Leverage is positive if the overall rate of capitalization exceeds the mortgage rate.  If the capitalization rate is greater than the mortgage rate, the borrower's return on investment will be increased by borrowing.

 

The interest rate and the equity dividend rate are equal when there is either no loan on the property or the interest rate is equal to the mortgage constant.  When either occurs, leverage is neutral.

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