Increasing Real Estate Return on Investment

Gaston Reboredo • September 25, 2021

Using Positive Leverage, other people's money to increase returns

How to increase return on investment in residential real estate by using debt financing.

I see many small residential real estate investors buying properties cash. To obtain the maximum possible return of a real estate investment an investor needs to review that he/she is renting the property at the maximum possible market rent, has a comprehensive maintenance program with cost reduction strategies and uses debt under a positive leverage situation.

The use of debt, such as mortgage financing, is a perfect way to maximize returns on real estate investments. The only way for this to work is in positive leverage situations.

Positive leverage is when a business or individual borrows funds and then invests the funds at an interest rate higher than the rate at which they were borrowed.

For example, if your total investment in a rental single family home is $200,000.00 and your net total income for that property a year is $10,000.00 then the yearly Return of this investment is 5%. This is the unlevered cash on cash return of the investment, also known as the Capitalization Rate ( Cap Rate).

If you are able to obtain a mortgage loan for the property with an interest rate below 5% this is call positive leverage and will increase the return on the investment but if the market interest rate is more than 5% this is negative leverage and will lower the return on the investment because the borrowed funds are costing more than what the investment is producing.

In other words the positive leverage calculation requires that you know the loan constant, which is the total annual loan payment (loan principal and interest) divided by the total loan.

The calculation is:

Loan constant = [annual loan payment] / [total loan amount]

If the loan constant is greater than the cap rate, it is positive leverage. If it is lower than the cap rate, it is negative leverage.

As an example calculation, assume a property is acquired for $200,000 and generates a net operating income (NOI) of $10,000 resulting in a 5.0% unlevered cash-on-cash return prior to using any debt. In this case, the cap rate is also 5.0% as explained above. Let’s assume we are obtaining an interest only loan.

If you as an investor are able to secure a 60% loan-to-value mortgage with an interest rate of 4.0% (interest-only), then total debt service payments would be $4,800 ($200,000 value times 60% LTV times 4.0%) and cash flow after debt service would be $5,200 ($10,000 NOI (net operating income) less $4,800 (debt service). Using debt, the investor would have contributed $80,000 of equity ($200,000 purchase price less $120,000 mortgage loan at interest only) which results in increasing the cash-on-cash return to 6.5% ($5,200 cash flow after debt service divided by $80,000 equity). This 6.5% is higher than the 5.0% cap rate and results in positive leverage.

The levered scenario obviously has a better return than the unlevered scenario. But is there a point at which using leverage is no longer a viable option? Yes — a higher interest rate can create a negative leverage situation. As an example, an interest rate of 5.2% would create an annual debt payment of ($120,000 times 5.2%) $6,240. $10,000 NOI less $6,240 debt service is $3,760. Then $3,760 divided by $80,000 is 4.70%, which is less than the 5.0% cap rate, creating negative leverage.

The use of leverage (financing) not only increases the return on the investment but also allows the investor in buying more properties because instead of putting the $200,000 as in our example above in one property, the investor can put 40% down payment which is $80,000 for a $200,000 purchase price and buy one property and be left with an extra $120,000 in hand to buy one or two more properties. This will not only dilute risk because now we have the funds invested in three properties maybe in three locations rather than all the funds in one property in one location but one of the great aspects of real estate investment is appreciation, values increase over time and are a great head against inflation and an excellent way to create wealth. For example if we use our total funds of $200,000 to buy two properties valued at $200,000 using 60% loan to value loans as in the example above, we are buying each property for $200,000 but with a down payment of $80,000 each and we still have $40,000 to buy a third property, let’s say valued at $100,000 using also financing on a 60% LTV, now we will own three properties, two valued at $200,000 and one at $100,000 so with the same $200,000 in cash, using leverage we now control $500,000 in real estate and if the appreciation rate is let’s say only 2% (usually is more than the inflation since there are many factors that influence property appreciation and not only inflation) we will be increasing our wealth by $10,000 every year since the value of all the properties ($500,000) will increase at 2%, rather than only the value of one property of $200,000 increasing at 2% which will create a wealth accumulation of only $4,000 a year instead of $10,000.

To calculate real returns of real estate investment we perform deeper analysis than the simple one here, taking into account the property appreciation over time as explained herein, then the return is composed of the yearly return after financing plus what the increase in value of the asset. This is the calculator of an Internal Rate of Return.

So in our example if we have a total return on our $200,000 investment in three properties would be the our 6.5% yearly cash on cash return plus the property appreciation ($10,000 increase in value, which is the 2% appreciation rate times the value of the three assets totaling $500,000, over our $200,000 total investment in the three assets) which is an additional 5%, so in a simple calculation we would make in one year a return of 11.5% over on our investment (6.5% plus 5%). Of course the portion of return allocated to the appreciation in value is not realized until we sell the property and we will have to take into account the selling costs and the time period from acquisition to the sale, which is what we obtain when we perform an Internal Rate of Return analysis. We will discuss Internal Rate of Return and Net Present Value and other topics of Financial Analysis in future blogs but the intent here is to illustrate how to increase returns on investment using real estate financing with positive leverage.

Gaston Reboredo CCIM CPM

< Older Post Newer Post >

Share this post

May Newsletter

By Florida PMServices • May 12, 2026

Welcome to the May edition of the Investor Newsletter! This month, the rental market is proving that strong returns are no longer just about rent growth. With operating costs taking center stage, investors are sharpening their focus on what really drives long-term returns. Inside, we cover these rising operating costs, take a quick look at ADUs, and round up the latest headlines shaping the market right now. The Quiet Profit Squeeze: Why Operating Costs Now Matter More Than Rent Growth Something is quietly changing inside single-family rental performance, and it is not something you will find in rent growth headlines! Even in markets where rents are holding steady or slowly growing, many portfolios are seeing a different pattern emerge; Net operating income is tightening, and the pressure is coming less from revenue and more from rising operating costs. Insurance has become one of the most unpredictable expenses for property owners. According to a recent article , premiums across commercial real estate are projected to rise another 8-15% annually in 2026. This is predicted to be driven by severe weather, higher rebuilding costs, and tighter underwriting standards. Bloomberg also recently noted that U.S. home insurance costs continue to rise as insurers adjust to growing climate and replacement cost pressures. For SFR investors, insurance is no longer a predictable line item. It is a cost that can impact cash flow from one renewal to the next. Maintenance and repairs are adding pressure as well. What many owners once viewed as routine upkeep has become a form of invisible inflation. According to a recent report , repair and maintenance costs have risen nearly 14% year over year and roughly 50% since 2020 in many locations. Deferred maintenance is also becoming more expensive to delay, often turning into much larger expenses down the road. Property taxes are another growing concern. Unlike insurance, tax increases tend to move more gradually through reassessments and municipal adjustments, making them easier to underestimate during underwriting. A Business Insider article highlights how taxes, insurance, and fees are becoming a larger share of “hidden costs” for property owners. Another article reported that property taxes and insurance now account for more than 21% of monthly housing costs in many markets. The takeaway for investors is that operational execution matters just as much as acquisition strategy. Strong returns depend on how well expenses are managed through proactive insurance reviews, preventative maintenance, tax monitoring, and disciplined renewal management. With rent growth normalizing in many areas, protecting NOI, rather than focusing only on revenue growth, may be becoming an even more important part of long term rental performance. Did You Know: Accessory Dwelling Unit (ADU) Everything You Need to Know in 60 Seconds! You might have heard them called "granny flats," "carriage houses," or "casitas," but in the real estate world, they are known as Accessory Dwelling Units (ADUs). As housing demand continues to rise nationwide, and many investors are looking for creative ways to maximize returns on existing properties, ADUs are a flexible option that can increase rental income, property value, and long-term investment potential. What is an ADU? An Accessory Dwelling Unit (ADU) is a smaller, secondary living space built on the same property as a primary home. To be a legal ADU, it must have its own kitchen, bathroom, and sleeping area. They can be detached, attached or repurposed from a home. Who uses an ADU? Homeowners and real estate investors often use ADUs to maximize their land and profits. It can provide a secondary housing option for additional tenants, multi-generational families, or short-term guests. For single-family rental investors, ADUs can turn one property into more income. Where are ADUs located? ADUs are appearing in neighborhoods across the country. As housing demand and affordability challenges continue to grow, more local governments are updating zoning rules to allow investors and homeowners to add these secondary living spaces to existing properties. When should an investor consider an ADU? ADUs may make most sense when a property has excess space, rental demand is strong, and local zoning allows secondary units. Many investors use this when they want to increase cash flow without purchasing another property. Why Are ADUs Important? ADUs are becoming a major trend in residential real estate. They can potentially: Increase rental income Help with housing shortages Offer flexible living arrangements Boost overall property value SFR Trending Headlines Stay Up to Date on the Hottest SFR News & Stories Wave of Price Cuts Arrives Before the Summer Heats Up Selena Gomez Eyes $1.6M Profit on Former Tom Petty Home Zillow and Redfin Brace for Major Legal Fight Are Tenants Saving by Not Owning ? Zuckerberg’s $170M Deal Breaks Miami Record Rate Update: We've Partnered with LendingOne to Bring You The Best DSCR Rates & Terms! DSCR Loan Advantages: Rates Often Lower Than Banks No Personal Income Requirement No Tax Returns Needed Not Reported on Credit Faster Closing Times Specialized Loans for Investors Only! Click for Financing Options! Until Next Month! The Florida Property Management Services Team