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Leverage (Hebelwirkung)

Using borrowed money to amplify returns

4 min readUpdated December 2024

Leverage (Hebelwirkung) means using borrowed money to increase investment returns. It's the secret behind why real estate can generate 15-25% annual returns when stocks average 7-8%.

How Leverage Works

When you put €100,000 down on a €500,000 property (80% financing), you don't just earn returns on your €100k—you earn returns on the full €500k value.

The Math: Leveraged vs. Unleveraged

Scenario A: No Leverage (All Cash)

  • Property value: €500,000
  • Your investment: €500,000
  • Annual appreciation (3%): €15,000
  • Annual return: 3%

Scenario B: 80% Leverage

  • Property value: €500,000
  • Your investment: €100,000
  • Annual appreciation (3%): €15,000
  • Annual return: 15%

Same €15k gain, 5x smaller investment = 5x higher return rate

Complete ROI with Leverage

But leverage amplifies ALL returns, not just appreciation:

€100,000 investment in €500,000 property:

  • Rental income (after costs):+€3,000
  • Tax savings (AfA + interest):+€6,000
  • Mortgage paydown (equity gain):+€6,000
  • Appreciation (3%):+€15,000
  • Total annual return:€30,000
  • ROI on your €100k:30%

The Risk Side

Leverage cuts both ways

Just as gains are amplified, so are losses. If property values drop 10% (€50k loss) with 80% leverage, you've lost 50% of your €100k investment. However, German real estate markets are historically stable, and long hold periods (10+ years) typically smooth out downturns.

Why Real Estate Leverage is Safer

  • Income produces cashflow: Properties generate rent to cover loan payments
  • Can't get margin called: Unlike stocks, banks don't force you to sell in downturns
  • Long fixed rates: 15-year rate locks protect you from rising interest
  • Tangible asset: Property has intrinsic use value beyond speculation

See how different leverage ratios affect your returns

Related Terms

Mortgage(Hypothek / Immobiliendarlehen)

A mortgage (Hypothek or Immobiliendarlehen) is a loan secured by property. In Germany, typical terms include 10-30 year fixed interest rates and 1-3% annual repayment rates.

Down Payment(Eigenkapital)

Eigenkapital (equity/down payment) is the cash you put down when purchasing property. German banks typically require 10-30% of purchase price plus closing costs (another 10-15%).

ROI(Return on Investment)

ROI (Return on Investment) measures how much profit you make relative to your initial investment. In real estate, it accounts for rental income, tax savings, and appreciation.