Real Estate Leverage is the use of borrowed money to purchase an investment property to avoid paying the full cash amount. For example, one purchases an investment property A valued at $250,000 with a mortgage requiring a deposit of $25,000 or 10% of the property value. In this case, the $25,000 has been leveraged into a $250,000 investment.

If, the investor decides increase his real estate portfolio, he may purchase another property B. This property is valued at $300,000 and requires a 10% mortgage deposit at $30,000. In this case, the $30,000 has been leveraged into a $300,000 investment

However, the investor does not have sufficient deposit money to acquire both properties. He must choose between property A or property B. Property A appreciates in value annually at $10,000 while property B appreciates at $5,000. In this case the smaller leverage money on property A of $25,000 generates a greater potential annual profit of $10,000. Therefore the investor should remain with property A.

If, however, the potential rent from property B is significantly higher than property A, then perhaps the former should be acquired instead. For example, property B generates $15,000 in rental income every year while property A only gives $8,500.

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