There has been a lot of talk in our industry about “negative leverage” but what does that mean?
At a high level, negative leverage occurs when the cost of debt negatively affects an investor’s rate of return.
This happens in market environments where the cap rate (net operating income divided by the value of the property) is less than the mortgage constant (annual debt service divided by the principal balance of the loan).
Our current situation, where cap rates on actively listed properties have remained relatively low while interest rates for leveraged buyers shot up in a short period of time, is the perfect catalyst for negative leverage.
If you are interested in more detailed information check out this article and reach out to your trusted mortgage banker.
Contributed by Sebastian Torres, Vice President
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