What does negative leverage refer to?

Negative leverage refers to a scenario in which the cost of borrowing funds exceeds the returns generated from an investment. This means that when an investor takes on debt to finance a purchase, the interest payments or other costs associated with that debt outweigh the income or appreciation generated by the asset. As a result, rather than amplifying profits, leverage can lead to increased losses, which is a critical concept in real estate and investment finance.

This situation can arise in various market conditions, particularly during downturns when property values decrease or rental income fails to keep pace with mortgage obligations. Understanding negative leverage is vital for investors, as it highlights the risks associated with using borrowed capital to invest, especially in volatile markets. By being aware of this concept, investors can make more informed decisions about leveraging their investments and the potential impacts on their overall financial health.