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Leverage

Leverage is an increase on the return on invested equity that results when part of the purchase cost of a property or project is financed by a loan at an interest rate that is lower than the Capitalization rate at which the property is purchased. For example, a property is purchased at a Cap Rate of 10% using 50% Equity and 50% money from a bank loan provided at a 5% annual interest rate. The investor uses 25% of the annual income to service the bank debt and keeps 75% of the income as a Return on the investment. Thus, due to the leverage created by the bank loan, the effective running yield is increased to 15% of the equity invested.

Term in Russian