situation in which financial benefits from ownership accrue at a lower rate than the interest rate paid for money; also called negative leverage.
situation, the opposite of financial leverage, where the interest on money borrowed exceeds the return on investment of the borrowed funds.
a situation in which financial benefits from ownership accrue at a lower rate than the mortgage interest rate.
Example: net-leased property is purchased for $100,000 with a $75,000 mortgage at 12% interest and $25,000 of equity. The net rent is $10,000 per year; interest expense is $9,000 per year. The $1,000 difference ( cash flow) provides a 4% return to the equity owner. In the absence of debt, the owner would receive a 10% return on the full purchase price. Reverse leverage works against the property owner.
