Picture a client reading the summary of a US apartment deal. The page shows the purchase price, the equity being raised from investors and a line for the senior loan, the main mortgage on the building. Most clients read the first two figures closely and pass over the third. Yet the loan is where leverage in real estate sits, and it shapes much of what later happens to the price and the equity.
Leverage is the debt used to buy a property. It magnifies gains and losses alike, and it adds a date the sponsor does not control, the day the loan matures and must be repaid or replaced. Before discussing anything else about a deal, and more so while US banks are growing cautious, the advisor should tell the client how much debt sits ahead of the client's equity, whether its rate is fixed or floating, and when it matures. The guide to US commercial real estate for advisors explains where the loan sits in a deal's structure.
What leverage in real estate does to the client's equity
A sponsor, the firm that finds and manages the property, rarely buys with investors' money alone. A lender provides part of the price as a loan secured on the property, and investors provide the rest as equity. The borrowed share of the value is called loan-to-value. The lender is paid first. For an Indian client the equity sits one step further away, because the client holds shares in a US corporation, a blocker, which holds the interest in the property.
Because the lender's claim is fixed, any change in the property's value falls first on the equity. A rise belongs to the equity holders, although they paid for only part of the building. A fall lands on them first, and a large enough fall can erase the equity while the loan is still owed in full. More debt means a thinner layer of equity and a smaller fall needed to reach it.
Positive and negative leverage in plain words
Whether borrowing helps or hurts the client's income depends on two measures. One is the property's net operating income set against its price, its cap rate, as the explainer on cap rates sets out. The other is the cost of the loan, its interest and any required repayment of principal. When the property earns more on each borrowed dollar than that dollar costs, the surplus goes to the equity, which is positive leverage. When the loan costs more than the property earns on the borrowed money, the shortfall comes out of the equity's share, which is negative leverage.
Negative leverage does not mean a deal is failing. It means the deal relies on rents or values rising, because the borrowing reduces the cash left for investors today. The advisor should ask which position the deal is in now and which the sponsor expects at refinancing, and treat the answer as a view rather than a fact.
Fixed or floating, and what the hedge covers
A fixed rate loan sets the interest cost until maturity, but it does not remove the risk at the end, when the loan must be replaced at whatever rate applies then. A floating rate loan moves with a market benchmark, so the interest cost, and the income left for investors, changes during the term. Some floating rate loans require the borrower to buy an interest rate cap. Fannie Mae's multifamily lending guide describes a cap as an agreement that pays the borrower when the rate exceeds an agreed level, putting a ceiling on its interest payments. The guide also has servicers reserve for a replacement cap, whose cost depends on market conditions. The advisor should ask whether the cap runs to maturity and who pays for a replacement.
Loan maturity and refinancing risk
Much of the risk in a property loan gathers at its maturity date. The Office of the Comptroller of the Currency, a US bank regulator, defines refinance risk as the risk that borrowers cannot replace existing debt at a future date on reasonable terms. Its bulletin of 3 October 2024 names commercial real estate loans among those most affected and points to loans with balloon payments, which are not fully repaid by maturity. It says the risk increases when interest rates rise, and it lists falling collateral values among the conditions that can stop a refinancing.
At maturity the sponsor has a short list of choices. It can refinance with a new lender, who will size the loan on the property's value and income at that time and may lend less. It can sell, or use an extension option if the loan has one and its conditions are met. It can also ask investors for more money, bring in new capital that ranks ahead of them, or hand the property to the lender. Several of those paths can cost the client part or all of the equity.
Recent data show the pressure. Trepp's delinquency rate for US commercial mortgage-backed securities, which are loans pooled and sold to bond investors, reached its highest level since late 2020 in September, according to a Scotsman Guide report of 6 October 2026. Four of the five large loans driving the increase had missed their maturity payoff dates earlier in the year. Over the same quarter, banks told the Federal Reserve's survey of senior loan officers that they had tightened standards, on net, for every category of commercial real estate loan, after easing most of them in the previous quarter.
Recourse, income tests and capital calls
The loan agreement also decides who absorbs a shortfall before maturity. The loan is secured on the property, and the sponsor may accept personal liability to the lender for certain events, which is called recourse. The advisor should ask what recourse the sponsor has given and whether investors could be asked for more money, since those who do not meet a capital call can see their share diluted. Loans also carry tests on the property's income, such as the debt service coverage ratio, which compares net operating income with the loan payments. If income falls below the agreed level, the loan may let the lender take control of the property's cash, and distributions can stop before the loan matures.
What advisors should ask before a client commits
An advisor needs no model of the deal for this conversation. The answers to six questions should come in writing, from the offering documents or the sponsor.
- How much is borrowed as a share of the property's value, and who is the lender?
- Is the rate fixed or floating, and if floating, is it capped and until when?
- When does the loan mature, and what extension options exist, on what conditions?
- What does the sponsor plan at maturity, and what happens if a new loan falls short?
- What recourse has the sponsor given, and can investors be asked for more money?
- What income tests does the loan set, and what happens to distributions if one fails?
The answers do not reduce the risk. Capital can be lost, property values can fall, tenants can leave and distributions may not be paid. A loan may not be refinanced on acceptable terms. The interest is illiquid, its rupee value moves with the exchange rate, and a single deal concentrates it all in one property and one loan.
Raveum offers eligible clients US real estate. Indian clients invest through a US corporation, a blocker, that holds the property interest, and they typically receive Form 1042-S. The property's debt ranks ahead of that interest. Advisors can see how introductions work on Raveum's partner page.
The client who skipped the loan line was reading the deal in the wrong order. Lenders that a sponsor will need at maturity grew more careful through the third quarter, and no survey says what that means for a single deal. An advisor who knows a deal's debt, rate and maturity date can explain it to the client without forecasting anything. The guide to US commercial real estate for advisors covers the rest of the structure.
Frequently Asked Questions
What is leverage in real estate?
Leverage in real estate is the use of borrowed money to buy a property. A lender provides part of the price as a loan secured on the property and is repaid first, while investors provide the rest as equity. Because the lender's claim is fixed, changes in the property's value fall first on the equity.
What is negative leverage in real estate?
Negative leverage is when a property's loan costs more than the property earns on the borrowed money, judged by comparing its cap rate with the cost of the debt. The shortfall reduces the cash left for equity investors. A deal in that position depends on rents or values rising, which may not happen.
How does leverage magnify losses in a property deal?
The loan must be repaid in full whatever the property is worth, so a fall in value comes out of the equity first. The more a deal borrows, the thinner the equity and the smaller the fall needed to reduce or erase it, even while the property keeps operating normally.
What happens when a commercial property loan matures?
The borrower must repay the balance, usually by refinancing or selling. Many commercial loans carry balloon payments and are not fully repaid by maturity. If a new lender offers less, the sponsor may use an extension, call for more investor money, bring in senior capital or hand the property to the lender.
Does a fixed rate loan remove interest rate risk from a property deal?
Only during the loan's term. A fixed rate keeps the payments steady until maturity, but the loan must then be replaced at the rate applying at that time. If rates are higher, or the property is worth less, the new loan may be smaller or more expensive, and equity investors bear the difference.
What risks does leverage add for an investor in a private US deal?
Leverage magnifies losses, exposes distributions to rising interest costs or failed income tests, and adds the risk that the loan cannot be refinanced at maturity. Any of these can lead to a capital call, new capital ranking ahead of investors, a forced sale or loss of the property, and so loss of capital.
This article is for general education and is not tax, legal or investment advice. Rules change and depend on individual circumstances. All investing involves risk, including loss of capital, illiquidity and currency movements. Offerings on Raveum are available to eligible investors only and are not open to the general public.
