Think of leverage (also known as debt) as a tool to scale your buying power and provide higher returns for a price (the interest rate). Simply put, leverage is using borrowed money to increase the return on an investment.

The idea behind leveraging real estate is to use other people’s money to increase your returns without having to put as much of their own money (also known as equity) into purchasing a property. Say you spent $100 total on a building, and the investment made a 10% *unlevered* (no leverage) return in one year. You end up with $10 of profit. If you do not use debt, the cash or equity in the deal would be $100, and the investment would have generated a 10% return ($10 profit / $100 equity = 10%). Now let’s say you bought the same building for $100, but to buy the building, you take out $80 in debt. As a result, you end up putting only $20 of your own cash or equity to complete the purchase of the $100 building ($80 debt + $20 equity = $100 building). Let’s say the building price increased by 10% from $100 to $110 and you sold it. In the previous example without debt, you generated a 10% return; now, because you sold the building for $110 and you have to pay back $80 in debt, your profit is $10 ($110 - $80 - $20 = $10) and your *levered *return is 50% ($10 profit / $20 equity = 50%).