Leverage is the use of borrowed money, typically a mortgage or other debt facility, to finance a portion of a property's purchase price or development cost. Rather than funding an acquisition entirely with equity, an investor puts down a smaller amount of capital and finances the remainder, which reduces the equity required for any single deal and allows that capital to be spread across more opportunities.
Leverage cuts both ways. When a property's income return exceeds the interest rate on its debt, borrowing magnifies the return earned on the equity portion of the investment. When the reverse is true and borrowing costs run higher than the property's return, leverage reduces equity returns instead, and it also increases risk during downturns since debt service must be paid regardless of how the property performs. Because of this, the amount of leverage used in a deal is one of the clearest signals of how conservative or aggressive its underwriting approach is.
Further reading: How Preferred Return Works in Real Estate Syndications
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