InvestingAll terms starting with L
Leverage
Using borrowed money to control a larger asset, amplifying both returns and losses.
A mortgage lets a modest down payment control a much larger asset, so appreciation and cash flow are earned on the full value while only part of the capital is yours. That is why cash-on-cash returns on financed property can exceed unlevered yield.
The amplification runs both directions. Leverage magnifies a downturn, and debt service continues through vacancy, which is what turns a difficult month into a serious problem.
Related terms
- Cash-on-cash returnAnnual pre-tax cash flow divided by the cash you actually invested, measuring return on money out of pocket.
- Cap rate (Capitalization rate)Net operating income divided by property value, the unlevered yield used to compare properties.
- DSCR (Debt Service Coverage Ratio)Net operating income divided by annual debt service: how many times the property covers its own loan payment.
- EquityThe difference between what a property is worth and what is owed against it.
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