What is the effect of using borrowed funds in terms of leverage?

Using borrowed funds effectively increases the leverage in a real estate investment. Leverage refers to the use of various financial instruments or borrowed capital—in other words, debt—to increase the potential return of an investment. When an investor borrows a larger percentage of the total purchase price, they are able to control a more significant asset with less of their own capital.

This heightened leverage means that any increase in property value results in more substantial returns relative to the initial investment. For instance, if an investor purchases a property primarily with borrowed funds, and the property value rises, the investor benefits from the increased value without having invested their own proportional amount fully. Essentially, leverage amplifies both potential gains and risks.

Utilizing cash would diminish leverage because it means that less borrowed money is being used versus the total investment effort. This lowers the proportion of debt financing, hence, reducing leverage. Additionally, leverage affects all types of properties, not just commercial ones, demonstrating its broad application across different real estate ventures. Thus, the answer accurately encapsulates the concept of leverage in real estate transactions.