Negative Leverage

Leverage means using borrowed money to buy an asset. Whether it helps or hurts depends on one comparison: the loan’s interest rate against the property’s cap rate, the return the property earns before financing. When the rate is lower than the cap rate, each borrowed dollar earns more than it costs, so leverage amplifies your return on the cash you put in. That is positive leverage.

Negative leverage flips it. When the mortgage rate sits above the cap rate, each borrowed dollar costs more than the property earns on it, so adding debt drags your cash-on-cash return below what an all-cash buyer would earn. In a higher-rate environment this catches investors who assume borrowing always boosts returns. The fix is usually a larger down payment, a lower purchase price, or a higher-yielding property, so the cap rate clears the loan rate again. Our cash flow vs cash-on-cash playbook works through a full example.