In real estate investment, what does "leverage" refer to?

Leverage in real estate investment specifically refers to the use of borrowed capital to enhance returns on investment. By utilizing loans or other forms of debt, investors can acquire properties with a smaller amount of their own equity. This strategy allows investors to purchase larger or more properties than they could with just their available cash. When the investment performs well, the returns on the equity invested can be significantly higher than if the investor had only used cash to buy the property outright.

For instance, if an investor purchases a property worth $1 million using $200,000 of their own money and $800,000 in a mortgage, they control an asset valued significantly higher than their own cash investment. When the property's value increases or it generates rental income, the investor benefits disproportionately since they are gaining returns on the full $1 million asset while having only invested $200,000 of their own funds.

This approach inherently carries risk, as leveraging amplifies both potential profits and potential losses. If the value of the investment decreases or expenses increase, the investor may face larger liabilities relative to their equity investment.