An investor buys a $1 million property with $200,000 of cash and $800,000 of borrowed money. The use of that borrowed money is leverage. It amplifies both gains and losses relative to the cash invested.

When property values rise or cash flow is strong, leverage boosts the return on equity. When values fall or vacancies spike, the same leverage magnifies losses and can wipe out the investor’s cash entirely. Lenders limit leverage through maximum loan-to-value ratios and debt-service coverage requirements.

Conservative investors use modest leverage; aggressive ones push ratios higher. Interest rates, amortization, and loan terms all affect the risk and reward of leveraged ownership. Understanding leverage is essential to understanding why real estate can build wealth quickly and why it can also destroy it.

Borrowed money is a powerful tool that cuts in both directions.