Leverage
The use of borrowed money to acquire a property, increasing potential returns and risk relative to an all-cash purchase.
Definition
Leverage is buying an asset partly or mostly with debt. Positive leverage occurs when the property's unlevered yield exceeds the cost of debt, so cash-on-cash return rises versus an all-cash buy. Negative leverage is the reverse. Higher leverage (higher LTV) amplifies both upside and downside: vacancy, expense spikes, or rate resets hit equity harder when debt service is large. A property is under-leveraged when equity is high and debt is low—owning free and clear is 0% LTV. It is over-leveraged when debt is high relative to value—financing near 100% of cost leaves little equity cushion. Most small bay acquisitions sit between those extremes, often in the 65–75% LTV range on conventional bank debt, subject to DSCR and credit constraints.
Example
Two investors buy identical $2,000,000 buildings producing $140,000 NOI (7.0% cap). Investor A pays cash. Investor B puts $500,000 down (75% LTV) with $90,000 annual debt service. Investor B's cash-on-cash is ($140,000 − $90,000) / $500,000 = 10.0%, higher than A's 7.0%—but B has default risk A does not.
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