What impact does leverage have on an investment?

Leverage impacts an investment by allowing investors to control a larger asset with a smaller amount of their own cash. By borrowing funds, typically through mortgages or loans, investors can increase their purchasing power and potentially acquire more expensive properties or larger portfolios than they could if they were relying solely on their own capital. This amplification of investment capability enables the investor to benefit from any appreciation in property value, as they can gain access to greater returns relative to their initial cash investment.

For example, if an investor uses leverage to purchase a property worth $500,000 with only $100,000 of their own equity and borrows the remaining $400,000, any increase in property value affects their equity significantly more than if they had purchased the property outright. If the property appreciates to $600,000, the return on the $100,000 initially invested is substantial, demonstrating how leverage can enhance potential returns on investment.

While leverage can increase potential returns, it also entails risks, including the obligation to service debt regardless of property performance, which is why options that suggest it decreases risk or guarantees higher returns do not fully capture the nuanced relationship between leverage and investment outcomes. Additionally, leverage does have an impact on returns, as it magnifies both gains and losses, which