Positive vs. Negative Leverage, in Plain English

Leverage — borrowing to finance part of a property's purchase price — has always been a core tool in real estate investing. Whether it helps or hurts comes down to a simple comparison: the property's cap rate (its net operating income divided by its value) versus the interest rate on the debt used to buy or hold it.

  • Positive leverage: When the cap rate is higher than the cost of debt, each additional dollar borrowed adds to the property's overall return. This is the classic case for using debt in real estate.
  • Negative leverage: When the cost of debt is higher than the cap rate, each dollar borrowed subtracts from overall return. The more debt on the property, the worse the effect.

For most of the 2010s and into 2021, NYC owners operated almost entirely in positive-leverage territory — interest rates sat well below prevailing cap rates, so adding debt was a reliable way to boost returns.

How Rising Rates Flipped the Equation

Since 2022, interest rates have risen substantially. Cap rates have moved too, but generally more slowly and by less — NYC values, particularly for multifamily and mixed-use assets, have been comparatively sticky even as debt costs climbed. The result is that many properties financed a few years ago, under a very different rate environment, now sit in negative leverage even though nothing about the real estate itself has changed. The building is renting well, expenses are in line, and operations are healthy — but the debt attached to it now costs more than the property yields.

This is one of the more disorienting parts of the current cycle for owners: the operational report card looks fine, sometimes even better than it did a few years ago, while the financial report card — cash-on-cash return, distributable cash flow — has quietly gotten worse. It's easy to mistake a financing problem for an operating problem, and the two call for very different responses.

Negative leverage is a financing condition, not a property performance problem. A building can be operating at full occupancy with rising rents and still generate a lower overall return than an all-cash purchase of the same asset would today, purely because of how the debt is priced.

Why This Matters Even If Cash Flow Still Covers the Mortgage

Negative leverage doesn't necessarily mean a property is losing money outright — many owners in this position are still covering debt service, just with much thinner margins than before. The real effect shows up in overall return on equity: because the debt is now a drag rather than a boost, the owner's return on the capital they have invested is often lower than it would be with less leverage, or than an equivalent unlevered investment would produce. Over time, that squeeze can limit an owner's ability to fund capital improvements, build reserves, or absorb an unexpected expense.

What Owners Can Do About It

There's no single right answer here — the best move depends on your specific loan terms, your equity position, and your outlook for the property and the rate environment. Generally, owners facing negative leverage weigh a few paths:

  • Pay down debt. Reducing the loan balance directly reduces the drag from negative leverage, though this requires available capital many owners would rather deploy elsewhere.
  • Wait it out. If there's a clear catalyst for rates to come down — and the owner has the liquidity and patience to ride out the interim — holding through the cycle can make sense.
  • Sell while pricing still reflects reasonable value. Waiting for cap rates to fully compress back to match a lower-rate future is a bet, not a certainty. Some owners conclude that selling into today's market, before further value adjustment, is the more prudent path — particularly if the property no longer fits their broader investment goals.

None of these decisions should be made in a vacuum. Your lender, accountant, and attorney can help evaluate the specific mechanics of your loan and your tax position before you commit to a direction.

Start With an Accurate Read on Value

Whichever path makes sense for you, it starts with knowing what your property is actually worth in today's market — not what it was worth when you financed it, and not a theoretical value based on a future rate environment that hasn't arrived yet. That number is the foundation for deciding whether to hold, restructure, or sell.