Leveraged Returns

Posted by Ted Mannon on Tuesday, April 19th, 2016 Category1

When investors borrow money to purchase investment real estate, one feature they look for is “positive leverage.” Positive leverage refers to when the return on the investment is higher than the cost of the loan, and it can be a tool to check for a potentially worthwhile investment. Banks also test a property’s return relative to the cost of the loan by applying a debt service coverage ratio. To calculate the ratio, banks divide a property’s annual debt service into its net operating income. A property with a $150,000 net operating income and $99,397 in debt service would have a 1.51 ratio. Typically, lenders like to see a ratio of at least 1.2; the higher the ratio, the higher the return relative to the cost of the loan.

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