positive and negative leverage

What is positive leverage, and how does it affect investments?

Positive Leverage is where an investor receives a higher rate of return on their investment than the rate they are paying to borrow funds for that investment.

An example of positive leverage is in a real estate transaction where the return on investment without leverage is 8%. This is said to be a CAP rate of 8%. If the loan is 3.5%, then there is positive Leverage.

Negative Leverage is where an investor receives a lower rate of return on their investment than the rate they are paying to borrow funds for that investment.

What is Negative Leverage?

There are a few scenarios where an investor might use to try to justify negative leverage. The first is if there are significant tax benefits to the purchase. In which case, the benefit of owning the property will exceed the actual net return.

Does it Make Ever Sense to Use Negative Leverage?

How much leverage to use is really a personal question that depends on how much financial risk you are willing to take. Many investors recommend your debt-to-equity ratio should not be higher than 70%. This is because being highly leveraged presents more risks in a downturn.

How Much Leverage Should Be Used?

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