Leverage Effect

The leverage effect refers to the financial strategy where a real estate investor or operator acquires a property using a combination of equity and borrowed capital. When debt costs less than the property's return potential, the return on the owner's invested capital is magnified beyond what equity-only financing would achieve.

Example: purchasing an office building for €1 million with €250,000 in personal funds and €750,000 in mortgage financing. If the property generates 7% annual yield while borrowing costs 4%, the effective return on the €250,000 equity substantially exceeds 7%. This multiplication of returns constitutes leverage. The inverse applies equally: declining property values or rental income compress profits and amplify losses proportionally faster.