Leverage and equity returns

Leverage amplifies. If the asset earns an unlevered yield above the loan constant, equity returns rise with debt (positive leverage); if below, debt makes a mediocre deal worse (negative leverage). The spread between yield-on-cost and the loan constant is the first sanity check on any financing.

Equity cash flow = NOI − debt service (− reserves). Cash-on-cash = that ÷ equity. IRR adds time: value growth, amortization's slow equity build, and exit. Note the asymmetry — leverage also amplifies losses, and the payment does not care that occupancy fell.

Reserves and structure round out reality: replacement reserves fund the capital plan, waterfall structures split cash between partners by preferred returns and promotes. Model distributions after reserves — the check partners receive is what they remember.