Positive Leverage

Positive leverage occurs when the return on the total property investment (cap rate) exceeds the cost of debt (mortgage constant), meaning borrowed money amplifies the investor's equity returns. In NNN investing, positive leverage is the mathematical engine of cash-on-cash return amplification. For example, if a property has a 6.5% cap rate and the mortgage constant is 7.8%, the property has negative leverage - the debt costs more than it produces, dragging down equity returns. But if the cap rate is 7.0% and the mortgage constant is 6.5%, each dollar of debt contributes an extra 0.5% to equity returns. In the current rate environment, positive leverage depends heavily on the specific cap rate, loan rate, and amortization period. Investors should calculate the mortgage constant (not just the interest rate) before assuming leverage is favorable.

Positive Leverage is a key concept that affects property valuation, financing decisions, and investment returns in the triple net lease market. Understanding Positive Leverage helps investors make informed acquisition and management decisions.

Positive Leverage directly influences how commercial properties are valued, financed, and traded. Changes in Positive Leverage can impact cap rates, NOI calculations, and overall investment performance for net lease properties.

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