Leverage

Leverage is borrowing to pay for part of a property, which lets an investor own a bigger asset than savings alone could cover. It magnifies returns in both directions. For property, it helps when the cap rate beats the mortgage constant and hurts when the mortgage constant is higher.

The mortgage constant is annual debt service divided by the loan amount, about 8.19% on a 30-year loan at 7.25%. The default house has a 5.78% cap rate. Every borrowed dollar costs more than the property earns on it, so borrowing lowers the owner's cash return. This is negative leverage.

To turn it positive, NOI has to rise, the price has to fall or the loan has to get cheaper. A higher NOI is the lever the owner controls most directly, through rent, vacancy and expenses.