In real estate investing, what does "leverage" refer to?

Leverage in real estate investing refers to the use of borrowed funds to increase the potential return on investment. When an investor utilizes leverage, they are essentially using other people's money—such as loans or mortgages—to purchase properties. This allows them to invest in larger assets or multiple properties than they could with just their own cash reserves.

By leveraging borrowed funds, an investor can amplify their purchasing power. For example, if an investor has $100,000 in cash, they might use that as a down payment on a property worth $500,000 by taking out a mortgage for the remaining amount. If the value of the property appreciates, the return on the investor's initial cash investment can be significantly greater than if they had bought the property outright with cash.

This strategy can lead to higher returns if the investment performs well, although it also comes with increased risk, as the investor is obligated to repay the borrowed funds regardless of the property's performance. Properly managed, leverage can be a powerful tool in the real estate investing toolkit.