Leverage
The use of borrowed money to control a larger investment, which can magnify both returns and risk.
Leverage is using borrowed funds so that a smaller amount of an investor's own cash controls a larger asset. When the property performs well, leverage magnifies the return on the cash invested. This is positive leverage.
Leverage also increases risk. If the property underperforms or values fall, the same borrowing magnifies the loss, which is negative leverage.
On the exam
Exam trap
Tested in
Value & Appraisal (9% of the exam)
From definition to recall
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- Mortgage
A security instrument that pledges real property as collateral for a debt. In Texas, lenders use a deed of trust to play this role.
- Cash Flow
The money left after subtracting operating expenses and mortgage debt service from a property's income.
- Equity
The owner's value in a property, equal to its current market value minus the debt owed against it.
This definition is Texas real estate exam-prep education, not legal, tax, or professional advice. Verify current rules against the official source before relying on them for a real transaction. Back to the full glossary.