Risk
Leverage means using borrowed capital to raise the return on equity, a technique especially common in real estate.
Leverage describes the use of borrowed capital, such as a bank loan, to raise the return on equity. In real estate it is particularly common: with 20% equity and 80% financing, the return on invested capital can be multiplied.
Example: a property for 200,000 EUR with 40,000 EUR of equity produces 10,000 EUR of profit at a 5% total return. Relative to the equity invested, that is a 25% return instead of 5%.
A word of caution: leverage amplifies losses too. If property prices fall, tenants leave or interest rates rise, the return on equity can quickly turn negative. A solid equity ratio of at least 20–30% protects against this risk.
Related terms
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