Portfolio Leverage Optimization Calculator

Too little leverage underpowers ROE; too much amplifies default risk — find the sweet spot.

Unlevered cap rate %

Senior rate %

Mezz rate %

Senior LTV cap %

Combined senior+mezz LTV cap %

Levered ROE at cap

0.33%

Senior spread

0.01%

Mezz spread

-0.05%

How the math works

Levered ROE = (cap + senior LTV × senior spread + mezz LTV × mezz spread) ÷ equity %.

7% + 65%×0.5% + 15%×(−5%)) / 20% = (7% + 0.325% − 0.75%) / 20% = 32.875% levered ROE.

How to Use

Enter unlevered cap rate %.
Enter senior borrowing rate %.
Enter mezz borrowing rate %.
Enter senior LTV cap %.
Enter mezz LTV cap %.
Enter equity return threshold %.
Read optimal leverage.

Frequently Asked Questions

Leverage math basics?

Levered ROE = unlevered yield + (leverage × spread), where spread = unlevered yield − borrowing rate. Example: 7% cap rate, 5% senior rate → 2% positive spread. Each 10% more leverage adds 0.2% to ROE. At 80% leverage, 7% cap rate + 80%×2% spread = 7% + 1.6% = 8.6% ROE. Works when unlevered yield > borrowing rate.

When does leverage hurt?

Negative leverage: unlevered yield < borrowing rate. Adding debt reduces ROE. 5% cap, 7% rate → −2% spread. 80% leverage drops ROE from 5% to 3.4%. Common in 2022-2024: cap rates compressed to 4.5-5.5% while rates rose to 7-8%. Best-in-class properties became cash-on-cash negative for new acquisitions. Only works when you expect cap rate to decompress before refinance.

Risk-adjusted optimum?

Real-world optimum is NOT maximum leverage. Default risk increases non-linearly with leverage. 60% LTV: 1-2% cumulative default probability over 5-year hold. 75% LTV: 3-5%. 85%+ LTV: 8-15%. Default outcome: 30-70% loss of equity. Risk-adjusted optimum usually 60-70% LTV for core assets, 65-80% for value-add, 55-70% for development.

Mezz vs junior debt trade-off?

Adding mezz stretches leverage higher (80 → 85% LTV) at higher cost (11-18% vs 5-8% senior). Spread still adds to ROE if unlevered > mezz rate. But: mezz default has severe equity consequences (UCC foreclosure of LLC interest, lose everything). Mezz worth it only when you expect execution lift (value-add, rent push, refinance soon). Not for pure yield plays.