Encyclopedia
Leverage (negative)
When the cost of borrowing is higher than the property's return, so borrowing lowers the buyer's return.
For example: An investor sees that more debt would reduce, not increase, cash-on-cash return. (Illustration only, not a real deal.)
This is a general industry term with no single official definition. Your lease or contract wording controls.
Example only, not a real client. Say you borrow at a rate higher than your building’s capitalisation rate (cap rate, annual income after running costs divided by price). Each borrowed dollar costs more than it earns, so your cash return is lower than if you had borrowed less. That is negative leverage.
What I’d tell a friend
When borrowing costs more than the property earns, more debt hurts your returns. Check this before deciding how much to borrow.
Why it matters to you
When the loan costs more than the property earns, every extra dollar you borrow lowers your return. Cash flow gets tight, a vacancy hurts more, and refinancing can be harder, so test the deal with less debt before you assume more is better.
How to use it in your deal
Buyers should compare the cap rate or unlevered yield with the loan constant, which includes interest and principal payments. When rates rise and cap rates don't, negative leverage becomes common.
A deal with negative leverage can still make sense if you expect strong rent growth, value-add upside or plan to hold long term, but you're relying on future improvements. Lower leverage or interest-only periods can help. Lenders check debt service coverage, which tightens when leverage is negative. Owners refinancing at higher rates may see cash flow drop.
Model several rate and rent scenarios before buying. Don't let a big loan amount hide weak returns. The Bank of Canada's rate decisions and bond yields influence borrowing costs, so watch them. If you can pay cash or use less debt, compare that return with the leveraged case; sometimes less debt simply gives more cash flow and less risk.
Ask your lender to quote different loan sizes so you can see the effect. Run the numbers at a higher rate too, so a renewal doesn't catch you off guard.
Mistakes I see
Ignoring the loan constant. Relying on appreciation. Over-borrowing.
In BC and Vancouver
The Bank of Canada publishes rate information.
Official sources: Bank of Canada: key interest rates
What it means
Negative leverage happens when the cost of debt is higher than the return on the property, often measured by cap rate.
It lowers your cash-on-cash return compared with paying more cash.
Managing it
Consider a lower loan amount, a longer amortization or waiting for better rates.
Some buyers accept it for a time if they expect income or value to rise. Test the numbers with realistic growth before you commit, and talk with your accountant.
Questions to ask before you sign
- What's the cap rate?
- What's the loan constant?
- Is leverage positive?
- What if rents don't grow?
Keep reading
Related terms: Cap rate spread, Cash-on-cash return
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General information for British Columbia only. It isn’t legal, tax, accounting or financial advice, laws and rates change, and reading it doesn’t make you my client. Any numbers or scenarios are hypothetical. Check the linked official source and talk to a lawyer, accountant or other qualified professional before you act or sign anything. See the terms and disclaimer.