5. Effects of Financial Leverage on Real Estate Investments

Chapter 5

Effects of Financial Leverage on Real Estate Investments

This chapter presents the effects of financial leverage on real estate investments. As such, the chapter has three main objectives:

to examine the impact of financing on the risk-return ratio as a function of two critical elements:
the loan to value ratio;
the difference between unlevered returns on investments and the debt servicing costs;
to clarify the circumstances in which financial leveraging is appropriate;
to provide some illustrations of the use of financial leverage.

The conduct of the analyses carried out in this chapter implies the inclusion of certain assumptions for the purpose of simplification regarding the return generating process and recourse to financial leverage.