Financial Leverage & Risk Analysis
Diversification Benefits
Advantages from investing less equity, buying more properties
Unleveraged BTIRR
Before Tax IRR without debt, 100% equity funded return
Liquidity Risk
Challenges in selling property quickly
Mortgage Covenants
Conditions like lease approval, updates, and property appraisal
Interest Rate Risk
Effect of variable rates on property value
Debt Coverage Ratio
Ensures timely mortgage payments to cover debt
Positive Financial Leverage
Higher returns with debt when property return exceeds debt cost
Inflation Risk
Impact of unexpected inflation on income
Environmental Risk
Liability for environmental issues in property chain of title
Debt Yield
NOI/Loan Amount - lender's annual return if property is taken back
Loan To Value Ratio
Protects lender if property value drops, ratio of loan to property value
Legislative Risk
Risk from regulatory changes affecting property
Mortgage Interest Tax Benefit
Tax advantage on mortgage interest payments
Financial Leverage
Using borrowed funds to increase investment returns