This example is not optimistic. It is deliberately conservative.
We’ll keep the asset constant and change only the capital structure, so the effect of leverage is isolated clearly.
The Starting Point (Same Asset, Same Rent)
Total property value: $10.5m
Market rent (Year 1): $743,000
Assumed operating costs: $0 (tenant responsible)
Net income = rent
Interest rate (assumed): 6.5%
Rent growth: 3% p.a. (contracted)
The building does not change in any scenario. Only the capital structure changes.
Scenario 1: No Debt (100% Equity)
Equity invested: $10.5m
Debt: $0
Net income: $743,000
Return on equity (ROE):
743,000 ÷ 10,500,000 = 7.1%
This is clean, simple, and very low risk. But all $10.5m of capital is tied up in one asset.
Scenario 2: 50% Debt
Equity invested: $5.25m
Debt: $5.25m
Interest cost @ 6.5%: $341,250
Net income after interest:
$743,000 – $341,250 = $401,750
Return on equity:
401,750 ÷ 5,250,000 = 7.65%
What changed?
Nothing operational changed:
• Same building
• Same tenant
• Same rent
Only the capital structure changed:
• Half the equity required
• Higher return on that equity
Leverage has improved capital efficiency without changing the underlying asset.
Scenario 3: 70% Debt
Equity invested: $3.15m
Debt: $7.35m
Interest cost @ 6.5%: $477,750
Net income after interest:
$743,000 – $477,750 = $265,250
Return on equity:
265,250 ÷ 3,150,000 = 8.4%
At this point:
• Returns are meaningfully higher
• Margin for error is thinner
• Lease strength and rate management matter more
This is where leverage requires discipline.
What the Numbers Are Actually Saying
Leverage works here only because:
• The property yield (7.1%) exceeds the cost of debt (6.5%)
• Rent is contracted, not hoped for
• The asset stands on its own
If those conditions reverse, leverage works the other way
Now Add Contracted Rent Growth (3%)
So far, we’ve held income constant. In reality, commercial property income typically grows over time through fixed or CPI-linked rent reviews.
Let’s apply 3% annual growth, contracted.
Year 1 rent:
$743,000
Year 5 rent:
743,000 × 1.03^5 ≈ $861,000
That is an extra $118,000 per year, without:
• Additional capital
• More tenants
• More effort
Why This Matters for Leveraged Equity
Debt costs are relatively stable, and rent grows.
That means:
• Interest coverage improves over time
• Cashflow to equity increases
• Risk can reduce over time as income rises
This is why experienced investors do not rush to pay property debt down. Time is doing much of the work.
The Key Takeaway
Leverage does not create value by itself, but amplifies the effect of stable income and time.
Used conservatively, it can:
• Improve return on capital
• Preserve flexibility
• Allow equity to compound
Used carelessly, it does the opposite.
Every situation is different. If you want to understand what a sensible leverage structure looks like for your business, the team at Attika can help you model it properly in the context of your cashflow, risk profile, and long-term goals.
