Reverse Leverage | Propertylogy

Reverse Leverage

By on May 7, 2019

Reverse leverage describes the situation where the interest rate of financing an asset (like a property) is too high for an investor to profit from it.

In other words, the financing costs of keeping a property strips away any profits from the income which it generates.

It is a term usually applied to expensive mortgages.

Also known as negative leverage, or sometimes debt financing, there are certain circumstances when taking on such loans do make logical investment sense when hyper appreciation is projected.

For example, in some booming real estate markets, property value can appreciate by as much as 20% in a year. So buyers willingly snap them up even with high interest rates predicting that they can still make money out of such deals with capital gains.

However, these are very risky strategies as no one can really predict the future.

For the regular home buyer, reverse leverage is not a smart position to get into.



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