Negative Leverage in Apartment Deals: When Debt Lowers Your Return
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Negative leverage is when borrowing lowers an apartment deal's cash return instead of raising it. It happens when the loan costs more each year, as a percentage of the amount borrowed, than the building earns as a percentage of its price. The quick test: compare the cap rate with the loan constant (the yearly loan payment divided by the loan amount). If the loan constant is higher, every borrowed dollar earns less than it costs, and the leverage is negative.
This post is part of our guide to real estate syndication. It explains the test and works through four loans on one building. Figures are as of November 2026; rates in the examples are illustrations, not quotes.
What is the formula?
The cash-on-cash return on the equity is:
levered yield = cap rate + (cap rate − loan constant) × (loan ÷ equity)
When the cap rate is higher than the loan constant, the second term adds to the return. When it is lower, it subtracts. The more you borrow, the bigger the effect in either direction. This ignores closing costs and reserves, which lower the real number further.
The loan constant for a fully amortizing loan depends on the rate and the amortization period. On a 30 year schedule, a 5.0% rate has a constant of about 6.44%, a 6.0% rate about 7.19% and a 6.5% rate about 7.58%. On interest-only payments, the constant equals the rate.
A worked example: one building, four loans
A building costs $10,000,000 and earns $600,000 of NOI, a 6.00% cap rate. The buyer borrows $6,500,000 (65% of price) and puts in $3,500,000 of equity. The figures are an example.
| Loan | Loan constant | Yearly payment | Cash flow after the loan | Cash-on-cash | Leverage |
|---|---|---|---|---|---|
| None (all cash, $10,000,000 of equity) | n/a | $0 | $600,000 | 6.00% | n/a |
| 6.5%, 30 year amortization | 7.58% | $493,013 | $106,987 | 3.06% | Negative |
| 6.5%, interest only | 6.50% | $422,500 | $177,500 | 5.07% | Negative |
| 5.0%, 30 year amortization | 6.44% | $418,721 | $181,279 | 5.18% | Negative |
| 5.0%, interest only | 5.00% | $325,000 | $275,000 | 7.86% | Positive |
Two things stand out. First, a 5.0% loan on a 6.0% cap rate building still produces negative leverage once it amortizes, because the constant (6.44%) is above the cap rate. Looking only at the interest rate would have missed that. Second, only the interest-only 5.0% loan beats the all-cash yield, and only while the interest-only period lasts. See interest-only periods on apartment loans for what happens after.
Why would anyone buy with negative leverage?
Because the cash yield in year 1 is not the whole return. A buyer may accept negative leverage today when:
- The income will grow. If NOI in the example rises from $600,000 to $700,000 through renovations and rent increases, cash-on-cash on the 6.5% amortizing loan rises from 3.06% to about 5.91%.
- The loan pays down. Amortization builds equity each year, which shows up at sale or refinance, not in distributions.
- The buyer expects to refinance. A lower rate later would lower the loan constant. That is a bet on rates, and nobody can promise it.
- Prices are expected to rise. A lower exit cap rate raises the sale price. That is the weakest reason, because it depends on the market, not the business plan.
Each reason is legitimate as part of a plan. What matters is whether the plan still works if the reason does not happen. Our post on sensitivity analysis shows how to test it.
Is negative leverage common in 2026?
It became common after interest rates rose in 2022 and 2023, when loan constants climbed above the cap rates many apartment buildings traded at. We do not publish a market-wide figure, because cap rates and loan terms vary by market, building and lender and change monthly. To check a specific deal, compare its going-in cap rate with the constant on its actual loan quote. Our post on cap rates and the 10 year Treasury explains how the two move together.
Questions to ask a sponsor about leverage
- What is the going-in cap rate, on tax-adjusted trailing NOI? (See how to calculate cap rate.)
- What is the loan constant on the actual loan, during and after any interest-only period?
- Is leverage positive or negative in year 1? In the first year of amortization?
- Which assumption turns the deal positive: NOI growth, refinance or exit cap rate? By how much must it happen?
- What do distributions look like if that assumption arrives two years late?
A sponsor with a sound plan can answer each one with a number. No projection is a promise, and every investment can lose money.
How DoorRaise fits in
DoorRaise helps sponsors raise equity for apartment buildings with 5 or more units from their friends and followers. The deal page shows investors the projected returns DoorRaise computes from the sponsor's inputs, after DoorRaise's fees. DoorRaise forms the deal's LLC, prepares the offering documents, files Form D and verifies every investor's accreditation, in 506(b) and 506(c) deals. Investors fund by wire into escrow at Enterprise Bank & Trust. DoorRaise charges two flat fees: $1,500 to set up (non-refundable) and $5,000 a year for administration, the first year paid at closing from the money raised and only if the deal closes.
Check the leverage on your next deal with the free cap rate and DSCR calculator, then start your deal.
FAQ
What is negative leverage in real estate?
It is borrowing that lowers the return on equity because the loan's yearly cost, as a percentage of the loan, is higher than the property's yield, as a percentage of its price.
How do you know if leverage is positive or negative?
Compare the cap rate with the loan constant. If the cap rate is higher, leverage is positive. If the loan constant is higher, leverage is negative.
Why use the loan constant instead of the interest rate?
The constant includes principal as well as interest, so it is the real yearly cash cost of the loan. On a 30 year schedule it is higher than the rate, which is why a loan with a rate below the cap rate can still be negative leverage.
Can a deal with negative leverage still be a good investment?
It can, if income growth, loan paydown or a sale later make up for the lower cash flow early on. The risk is higher, because the return depends more on things that may not happen.
Does interest-only debt fix negative leverage?
Only for the interest-only period, and only when the rate is below the cap rate. When amortization starts, the loan constant rises and leverage can turn negative again.
Sources
- Fannie Mae Multifamily, fixed-rate mortgage loans
- Freddie Mac Multifamily, Optigo Conventional Small term sheet
- Federal Reserve Bank of New York, Secured Overnight Financing Rate data
This article is general information, not legal, tax or investment advice. The example building, loans and rates are illustrative. DoorRaise is not a lender, law firm, broker-dealer, investment adviser or funding portal.