Negative Leverage

Definition: Negative leverage occurs when the cost or cash burden of debt reduces the investor's equity return under the measure being analyzed.

Example

In a simplified interest-only example, a $100,000 property earns $5,000 before financing. A $50,000 loan at 8% leaves $1,000 on $50,000 equity, a 2% return instead of 5%, ignoring other costs.

Keep the distinction clear

The investment can still have positive cash flow while debt lowers the equity return. Identify whether the question compares cash flow, total return, or another measure.

Related terms

Leverage · Positive Leverage · Cash Flow

Keep studying

Income Approach: NOI, Cap Rate, Property Value, and Cash-on-Cash Return

References: FREC Course II syllabus: investment concepts

Pronunciation (US): NEG-uh-tiv LEV-er-ij (capitals show stress)

Pronunciation reference: Merriam-Webster