Leverage

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Leverage

A method of financing an investment by which an investor pays only a small percentage of the purchase price in cash, with the balance supplemented by borrowed funds, in order to generate a greater rate of return than would be produced by paying primarily cash for the investment; the economic benefit gained by such financing.

Real estate syndicates and promoters commonly use leverage financing. A leveraged investor builds up Equity or ownership in the investment by making payments on the amount of principal borrowed from a third person. The money allotted to the repayment of interest charged on the borrowed principal is treated typically as a deduction that reduces taxable income. The greater the amount of principal borrowed, the larger the interest payments and the resulting deductions. Obviously, a taxpayer who pays cash is not entitled to deductions for interest payments. In many cases, deductions for the depreciation of thecapital asset constituting the investment are also permitted.

Any investor receives an anticipated rate of return from the investment although the rate may fluctuate depending upon the economic climate and the management of the investment. Because of the favorable tax treatment enjoyed as a result of this method of financing, the leveraged investor keeps more of the income generated by the investment than an investor who financed the investment mainly through cash. There is, however, risk involved in leverage financing. If the income generated by the investment decreases, there might not be adequate funds available to meet payment of the outstanding principal and interest, leading to substantial losses for the investor.

West's Encyclopedia of American Law, edition 2. Copyright 2008 The Gale Group, Inc. All rights reserved.

leverage

1) n. the use of borrowed money to purchase real estate or business assets, usually involving money equaling a high percentage of the value of the purchased property. 2) v. to borrow most of the funds necessary as a loan against real estate to buy other real estate or business assets. The dangers of high leverage are over-appraisal of the property to satisfy a lender, a decline in the value of the property (which may have been purchased during a period of high inflation), high carrying costs (interest, insurance, taxes, maintenance) which exceed income, vacancies, and/or inability to finance improvements to increase profits. Too often the result is the collapse of "paper" real estate empires which have been created by risky leveraging.

Copyright © 1981-2005 by Gerald N. Hill and Kathleen T. Hill. All Right reserved.
References in classic literature ?
Then the Time Traveller put forth his finger towards the lever. `No,' he said suddenly.
The lever resisted his strength for a time, then over it came, and instantly the tail of the machine cocked up and the wings became rigidly spread.
A little lever that had hitherto been obdurate now confessed itself mobile.
He was between a tree-stem and the saddle, with his leg over the steering lever and, so far as he could realise, not hurt.
Lever, the proprietor, of course had disappeared in convulsions of courtesy long before.
Lever coming towards them with his lumbering quickness.
"Nothing," said Lever, with a deepening accent, "only you did not.
Edmond inserted his lever in the ring and exerted all his strength; the flag-stone yielded, and disclosed steps that descended until they were lost in the obscurity of a subterraneous grotto.
After several blows he perceived that the stones were not cemented, but had been merely placed one upon the other, and covered with stucco; he inserted the point of his pickaxe, and using the handle as a lever, with joy soon saw the stone turn as if on hinges, and fall at his feet.
Before ever his minions could lay their hands upon you, you might seize this very lever from which you have just warned me and wipe out the entire city."
A dozen times shots grazed the Thuria's side, and as Carthoris could not leave the control levers, Thuvia of Ptarth turned the muzzles of the craft's rapid-fire guns upon the enemy as she clung to the steep and slippery surface of the deck.
I shook my head sadly, and motioned to the starting lever. Perry pulled it toward him, and once again we were plunging downward toward eternity at the rate of seven miles an hour.