Abstract: During the economic downturn after the Great Financial Crisis, investors were confronted with the negative impact of leverage. Consequently, investors questioned loan-to-value (LTV) levels in their funds. Before the GFC, percentages around 50%–65% were common but never based on in-depth research or optimization. This paper examines the benefit of leverage using a simulation model to account for a multitude of scenarios and shows that portfolios with up to 40% LTV are still efficient. More leverage is likely to decrease return expectations. The reasons behind this conclusion are threefold: the disproportionately high cost of distress, asymmetric performance fees, and the impact of incremental interest rates.

Citation: “Leverage: Please Use Responsibly”, Journal of Real Estate Portfolio Management (2011), 17:2, 75-88