How real estate leverage works and how to calculate it

Property leverage is based on three key principles:

1. Immediate acquisition: You purchase a property with the potential to appreciate in value without having to save the full purchase price beforehand.
2. The interest rate differential: As long as your property's return exceeds the cost of borrowing, you can generate wealth using borrowed capital.
3. Rental income covering repayments: Your tenants' rent helps repay your mortgage each month.

To understand how this works, let's compare two scenarios involving the same initial investment of €30,000 over 20 years:

1. Traditional investment: You invest €30,000 in an account earning 4% annually. After 20 years, you would have approximately €65,000. This represents straightforward growth of your savings.
2. Property leverage: You use the €30,000 as a deposit to purchase an apartment worth €200,000. If this property also generates a 4% return, that return is calculated on €200,000 rather than just €30,000. After 20 years, assuming the rental income has covered the mortgage repayments, you own an asset worth €200,000, even before accounting for any increase in the property's value.

In this second scenario, you have created three times as much wealth with the same initial investment, thanks to the power of mortgage leverage. At Maison Kyka, we can help you purchase and renovate a property, unlocking its full potential and increasing its appeal on the property market.

Economic return and return on equity

To assess the potential of a property investment, investors need to consider two key indicators:

• Economic return (R_eco) measures the property's underlying investment performance.
• Return on equity (R_fi) measures the return generated on the money you have personally invested.

Focusing exclusively on the property's yield, calculated by comparing rental income with the purchase price, is a common mistake. It overlooks a fundamental question: is your personal investment working harder here than it would in a traditional financial investment?

The aim is to use borrowing while ensuring that the project's return on equity exceeds its economic return. The objective is for every euro of your own money to unlock additional bank financing that generates returns on your behalf.

For example, if a property generates a 5% return, your return without borrowing is naturally 5 %. However, with a mortgage covering 90 % of the purchase price, the return on your own investment could rise to 15 %. You benefit from the returns generated by the apartment's total value while contributing only 10 % of the capital yourself.

Internal rate of return: looking beyond cash flow

A common mistake is to assess an investment solely on its cash flow, meaning the amount remaining each month after mortgage repayments. However, a more comprehensive indicator of wealth creation is the internal rate of return (IRR). A property investment can have zero cash flow, meaning it just covers its own costs, and still represent an excellent long-term investment.

The internal rate of return takes into account:

1. Net cash flow generated each month.
2. Mortgage principal repaid through rental income, gradually increasing the equity you hold in the property.
3. Potential capital gains when the property is sold.

This is where property leverage becomes particularly apparent: even with zero cash flow, your tenants are effectively helping you acquire the property. By the end of the mortgage term, you own an asset whose value you have built up through borrowing rather than personal savings alone, backed by real estate, traditionally considered one of the more reliable long-term investments.

“We chose Maison Kyka for our first investment! We're absolutely delighted with the result. Our apartment is perfect, and Céline and Anton provided fantastic support throughout. They were attentive and extremely responsive. A huge bonus: the project was completed almost exactly on schedule. We couldn't recommend them more highly!” Jeanne S.

The formula for calculating property leverage

Property leverage is based on the difference between the return generated by a property and the cost of borrowing.

The formula for calculating property leverage is:

In short, the smaller your personal contribution relative to the amount borrowed, the greater the potential multiplier effect, provided the economic return (R_eco) exceeds the interest rate (i).

Example

Imagine your property generates a 5 % return and your borrowing costs 3 %. The difference is 2 %. If your debt is nine times your equity contribution, you add 18 % (2 % × 9) to your initial 5 % return. Your personal investment therefore generates a return of 23 %.

Beware of negative leverage

Property leverage is a double-edged sword that must be used carefully. When market conditions are unfavourable, the mechanism can work in reverse, creating what financial experts call negative leverage.

When interest rates are high or rental yields are too low, borrowing can cost more than the property actually generates. Debt then becomes a financial burden that erodes your capital instead of helping you build wealth.

To avoid this situation, it is essential to ensure that your net return, after expenses and taxes, remains higher than the total cost of borrowing, expressed through the annual percentage rate of charge (APR, or TAEG in France).

If you purchase a property generating a 3 % net return with a mortgage costing 4%, each euro borrowed creates a negative spread of 1 %. In this scenario, your personal capital is gradually eroded to cover the difference.

Even if your property investment looks promising on paper, take the time to put it through a stress test. The aim is to assess whether your investment would remain viable under less favourable circumstances, such as:

• Rental vacancies: Would your investment still be viable if the property remained vacant for one or two months each year?
• Rising expenses: Could you absorb an unexpected 15 % increase in co-ownership charges?

Despite mortgage interest rates exceeding 3 %, investing in property in 2026 can remain a sound strategy when the project is carefully planned and managed from start to finish.

Maximising property leverage through renovation

France's Climate and Resilience Law is gradually restricting the rental of energy-inefficient properties, beginning with homes rated G, followed by F and E on the French Energy Performance Certificate (DPE). While many see these requirements as a constraint, they also present an opportunity to create value through borrowing.

The idea is to use mortgage leverage not only to purchase a property but also to finance improvements to its energy efficiency. Buying a property that already meets high energy standards, with an A or B rating, is expensive and generally offers lower yields. Conversely, properties with poor energy ratings often sell at a discount.

Buying a property in need of renovation offers several advantages:

• Discounted purchase price: You acquire a property at a lower price because it requires renovation.
• Comprehensive financing: The bank finances both the property purchase and the renovation works.
• Tax advantages: Eligible renovation expenses can create a rental property deficit (déficit foncier), potentially reducing the tax payable on your rental income for several years.
• Immediate value creation: Bringing the property up to modern standards can increase its resale value as soon as the renovation is complete.

To illustrate this mechanism, consider an apartment with an E energy rating. You purchase it at a discount because of its condition and borrow an additional €30,000 to finance the renovation. Thanks to these improvements, the property achieves a C rating.

As a result, you increase the rent by 15 % compared with its original condition, while the apartment's market value rises by €50,000.

By using borrowed funds to finance the renovation, you have created €20,000 in additional net property value as soon as the work is completed. You also benefit from a property that remains attractive on the rental market for years to come.

“Maison Kyka is an incredible experience, with an amazing team! I'm now the proud owner of a property that Maison Kyka found and completely renovated for me! Buying your first home can be complicated and intimidating, so having this level of support made it the best possible experience!” Jordan L.

Looking to maximise the property leverage of your investment? Maison Kyka can help. We identify properties with strong potential and manage their renovation to transform your investment into an exceptional property asset.

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