Quiz: Leverage and Financing

1. An investor puts 25% down on a $400,000 property. The property appreciates 10% to $440,000. Their return on equity (from appreciation alone) is:

10%25%40%4%

Down payment = 25% of $400,000 = $100,000. Appreciation = 10% of $400,000 = $40,000 gain. Return on YOUR cash = $40,000 / $100,000 = 40%. This is leverage: a 10% property gain produces a 40% return on invested capital because the bank funded 75% of the purchase.

2. A DSCR loan qualifies the borrower based on:

The borrower's personal W-2 income and tax returnsThe property's rental income relative to the proposed debt service paymentThe borrower's credit score aloneHow many properties the borrower already owns

DSCR loans qualify the property, not the borrower's personal income. If the property's rent covers the mortgage by the required ratio (typically 1.0-1.25x), the loan is approved. This allows investors who write off income on taxes to still qualify based on property cash flow.

3. Hard money loans are typically used for:

Long-term buy-and-hold with lowest possible ratesShort-term bridge financing for value-add or flip projects where speed matters more than rateOwner-occupied primary residencesProperties that have no value

Hard money is short-term (6-24 months), high-rate (10-14%), asset-based lending. Investors use it when they need to close fast (competing with cash offers), the property doesn't qualify for conventional financing (distressed condition), or they plan to refinance or sell quickly after renovating.

4. Leverage works against you when:

Property values increaseThe property's total return (cash flow + appreciation) is less than your cost of debtInterest rates decreaseYou have high occupancy

Leverage amplifies returns in both directions. If your property earns 4% total return but your debt costs 7%, leverage destroys value. You're paying more to borrow than the asset earns. Negative leverage means every borrowed dollar makes your overall return worse.

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