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Leverage

The amount of debt utilized against a property. For example, assume you have a $100,000 property financed with a mortgage of $75,000 and a $25,000 cash down payment. This property would have a debt to equity ratio of $75,000/$25,000 or 3. Expressed in another way, for every dollar of net worth in the property, there are three dollars of mortgage owed.

Higher leverage increases financial risk. This is because borrowing cash creates an obligation to pay interest that will increase costs. A property with leverage will have to perform better for the same result than the same property without leverage. Another reason is that property owners can become “underwater” easier with changes of property values.