Negative Leverage: When Cap Rate Is Below Your Rate

By RentalAnalytics Editorial Team · Published November 9, 2026

Key takeaways

• Negative leverage, as this page uses the term, is a cap rate below the interest rate. Debt then pulls the cash yield on equity below the cap rate.
• Stessa describes the result as investors making less money than the banks on the asset while taking more risk. The market figures on that page are from 2021 and 2022 coverage, so they are not repeated here.
• The loan constant is annual principal and interest divided by the loan amount. It is higher than the interest rate because the payment includes principal.
• A round $400,000 price, $30,000 rent, $10,000 expenses, 40% down, and a 7% 30-year loan produces $839.29 of cash flow and 0.52% cash-on-cash on the down payment. The same property at 25% down does not cash flow.
• Test the inputs in the cap rate calculator and the DSCR calculator. The cap rate page adds 3% of price as closing costs before it divides.

What is negative leverage?

It is the gap between what the property earns before debt and what the loan costs. Cap rate ignores the loan. Cash-on-cash does not. When the cap rate is below the rate on the debt, borrowing reduces the return on equity instead of raising it.

Stessa's plain statement is the definition used here: "Simply put, this means that as borrowing costs rise, investors make less money than the banks on their assets despite taking on more risk." Stessa, "The rise of negative leverage" That page was last updated December 23, 2024, and its price and rate examples come from 2021 and 2022 reporting. This post teaches the comparison from the formula, not from those older market prints.

Cap rate versus cash-on-cash keeps the two yields side by side. DSCR loans: terms, lenders, and your rate covers how a lender compares rent with the payment. Neither page is a substitute for the arithmetic below.

How do cap rate, the interest rate, and the loan constant compare?

Cap rate is NOI divided by price. The interest rate is the annual rate on the loan. The loan constant is one year of principal and interest divided by the loan amount. Compare cap rate with the interest rate to see whether debt raises or lowers the equity yield. Compare cap rate with the loan constant to see whether NOI covers the full payment.

The constant is higher than the interest rate on a fully amortizing loan, because each payment retires principal as well as interest. A cap rate that matches the interest rate can still sit below the constant. Cash flow is then tighter than the rate comparison alone suggests.

A DSCR above 1 only says NOI covers the payment. It does not say the equity yield beat the cap rate. The example keeps both results.

What does a round example show?

These inputs are a worksheet, not a listing and not a forecast. Price is $400,000. Monthly rent is $2,500, so annual rent is $30,000. Vacancy is 0%. Operating expenses are $10,000. NOI is $20,000. Cap rate is $20,000 divided by $400,000, or 5.00%. The loan rate in the example is 7.00% and the term is 30 years.

The payment is the standard fully amortizing formula, the same one in the cap rate calculator and the DSCR page: loan times the monthly rate, divided by 1 minus (1 plus the monthly rate) raised to the power of minus the number of months. Figures below use that unrounded payment times 12, then round money to the cent.

At 40% down the property still cash flows. $839.29 divided by the $160,000 down payment is 0.52%, far under the 5.00% cap rate. The loan constant, $19,160.71 divided by $240,000, is 7.98%. NOI covers the payment, and the equity yield does not match the unlevered yield. That is the case the hook describes.

At 25% down the same NOI does not cover the payment. Cash flow is -$3,950.89 and DSCR is 0.835. More debt makes the miss larger. It does not repair a cap rate that already sits under the rate.

All cash, with closing costs left out, the return on the $400,000 price is the 5.00% cap rate. Skipping the loan removes the constant from the yield.

How do you test it in the cap rate and DSCR tools?

On the cap rate calculator, enter purchase price $400,000, annual gross rent $30,000, vacancy 0, and operating expenses $10,000. Turn on financing. Enter down payment 40, interest 7, and term 30. Leave ZIP blank if you only want this arithmetic. An empty ZIP still loads a Tier 2 band. Read cap rate and cash-on-cash, not that band, for this example.

The calculator adds closing costs equal to 3% of price, or $12,000, before it divides. Cash invested is $172,000, not $160,000. It also rounds each dollar line to the nearest dollar. On these inputs it shows monthly principal and interest of $1,597, annual debt service of $19,161, cash flow of $839, and cash-on-cash of 0.49%. The 0.49% is $839.29 of unrounded cash flow divided by $172,000. The 0.52% in the table above divides the same cash flow by the down payment only.

On the DSCR calculator, enter monthly rent $2,500, vacancy 0, and expense fields that add to $10,000. Enter loan $240,000, rate 7, and term 30. NOI is $20,000. Annual debt service displays as $19,160.71. DSCR displays as 1.044. The target field is an input. It does not change that ratio.

Which levers close the gap?

The gap in the 40% down case, measured as cash-on-cash on the down payment versus the 5.00% cap rate, closes when cash flow reaches 5% of $160,000, or $8,000. Debt service stays $19,160.71, so NOI has to reach $27,160.71. That is $7,160.71 more NOI than the $20,000 in the example. Closing costs stay out of this sketch. Each lever below changes one input and holds the others.

• Rent. With vacancy at 0% and expenses at $10,000, annual rent has to be $37,160.71, or $3,096.73 a month.
• Expenses. With rent held at $30,000, expenses have to fall from $10,000 to $2,839.29.
• Price. Hold NOI at $20,000, the rate at 7%, the term at 30 years, and the down payment at 40% of the new price. A price of $294,543 puts cash-on-cash on that down payment at 5.00%. Cap rate at that price is $20,000 divided by $294,543, or 6.79%.
• Rate. On the original $240,000 loan, a 2.91% rate produces annual debt service of $12,002.85 and cash flow of $7,997.15, which is 5.00% of the $160,000 down payment. That rate is an example input, not a quote. At a 5% rate, equal to the cap rate, annual debt service is $15,460.46, the loan constant is 6.44%, and cash-on-cash on the down payment is 2.84%. Principal in the payment keeps the constant above the cap rate.
• Skip the loan. The unlevered yield on these inputs is the 5.00% cap rate.

Run one change at a time in the calculator. A rent estimate belongs in the rent estimator before it becomes the income line. This worksheet does not say which lever a seller will accept.

FAQ

What is negative leverage in real estate?

On this page it means the cap rate is below the interest rate, so debt pulls the cash yield on equity below the unlevered cap rate. Stessa describes the result as investors making less money than the banks on the asset while taking more risk.

Does a deal with DSCR above 1 still have negative leverage?

It can. In the round example, NOI of $20,000 divided by annual debt service of $19,160.71 is a DSCR of 1.044, and cash-on-cash on the down payment is 0.52% against a 5.00% cap rate.

What is a loan constant?

It is annual principal and interest divided by the loan amount. On the $240,000 loan at 7% for 30 years, annual debt service is $19,160.71, so the constant is 7.98%. That sits above the 7% rate because the payment includes principal.

Why can cash flow stay positive while the return falls?

A large down payment shrinks the loan. In the example, 40% down leaves $839.29 of cash flow after debt, which is 0.52% of the $160,000 down payment. The same property at 25% down has negative cash flow.

How do I match the cap rate calculator?

Enter price $400,000, annual rent $30,000, vacancy 0, operating expenses $10,000, down payment 40%, rate 7%, and term 30 years. The page adds 3% of price as closing costs, so cash-on-cash shows 0.49%, not the 0.52% figured on the down payment alone.

Is this example a market forecast?

No. The price, rent, expenses, and 7% rate are round inputs for the arithmetic. Replace them with a rent estimate, a loan quote, and the bills for a real property.

Sources

1. Stessa, "The rise of negative leverage" (last updated December 23, 2024) - https://www.stessa.com/blog/the-rise-of-negative-leverage/
2. RentalAnalytics, Cap Rate Calculator - https://rentalanalytics.com/tools/cap-rate-calculator
3. RentalAnalytics, DSCR Calculator - https://rentalanalytics.com/tools/dscr
4. RentalAnalytics, Cap rate versus cash-on-cash - https://rentalanalytics.com/blog/cap-rate-vs-cash-on-cash
5. RentalAnalytics, DSCR loans: terms, lenders, and your rate - https://rentalanalytics.com/blog/dscr-loans-terms-lenders-and-your-rate