As a rule, leverage should not exceed 75%, including mezzanine and preferred equity, because both of these types of debt sit ahead of common equity in payment order. At Origin, our portfolios never exceed 70% leverage, and we do not use mezzanine debt or preferred equity on any deals – only common equity. Returns should be generated primarily from the performance of the real estate – not through excessive use of leverage – and it’s critical that investors understand this point.
Often, property investors don’t realize how important it is to quantify leverage, so they end up in overleveraged investments. Investors should ask about how much leverage is used to capitalize an asset, and ensure they are receiving a return commensurate with the risk.
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