Leverage: High Heels That Add Height with Someone Else’s Money

Put on a pair of high heels and you instantly gain seven, ten centimeters of height. Your walk turns elegant, and how people look at you changes. But the heel isn’t actually making you taller — it’s a tool propping you up. On flat ground, no problem. But misstep, or catch a heel wrong on a stair, and the higher the heel, the worse the fall. The taller you look, the greater the risk grows alongside it. That’s the double edge of high heels.

In real estate, “leverage” is exactly this pair of heels. Buy a building using someone else’s money (a loan) and your return looks far higher than if you’d bought it with cash alone. But if you fall off that heel, you fall much harder than you would standing barefoot.

How the height increase works, in numbers

Say there’s a building worth $1,000,000. Its NOI (Net Operating Income, the take-home pay from the previous chapter) is $60,000 a year, so the cap rate is 6%.

Investor A buys the whole building outright, in cash, for $1,000,000. A’s return is exactly 6%: put in $1,000,000 of your own money, earn $60,000 a year.

Investor B puts down only $300,000 of their own money and finances the remaining $700,000 with a loan at 4% interest. B pays the bank $28,000 a year in interest. Subtract that from the $60,000 NOI, and what’s actually left in B’s hands is $32,000. But since B only put in $300,000 of their own money, B’s return is $32,000 ÷ $300,000 ≈ 10.7%.

Same building, same rent — yet A earns 6% and B earns 10.7%. That’s the magic of the heel. When the cost of someone else’s money (4% interest) is lower than the building’s own return (6% cap rate), the gap inflates the return on your own money. The industry calls this “positive leverage”: the heel working in the direction of lifting you up.

What happens when the heel snaps

Now imagine the same building runs into trouble. A major tenant leaves, vacancy rises, and NOI is cut in half, from $60,000 to $30,000.

A, who paid the full $1,000,000 in cash, sees the return drop from 6% to 3% — it hurts, but it’s still positive. Limping, but still walking.

B’s story is different. Subtract the $28,000 in interest from the $30,000 NOI, and what’s left is a mere $2,000. Having invested $300,000, B’s return craters to 0.7%. If things get just a little worse from here, if there isn’t even enough cash to cover the interest, B defaults on the loan, and the bank can seize the building it holds as collateral. A limps along; B has snapped a heel and gone down.

This is the essence of leverage. It isn’t a tool for generating returns — it’s a multiplier that amplifies gains and losses simultaneously. When things go well, you earn far more than everyone else; when things go badly, you get hurt far worse than everyone else. A low heel means a sprained ankle if you trip; the higher the heel, the more a single misstep changes the scale of the injury.

A Harvard dean’s two cities, one pattern

Leverage-driven collapse is a pattern real estate history has repeated more than once. One legendary developer who shaped much of twentieth-century New York’s skyline delivered major successes like Kips Bay and Century City, only to eventually lose most of it all. What he got right was his vision for the future of the city center: it was accurate. What he got wrong was pushing that vision forward with debt too large before reality had caught up to it. Decades later, a Canadian real estate family developing London’s Canary Wharf lived out almost the identical story. Different era, different city, different continent — same pattern. The vision was right; leverage was what killed it.

This pattern isn’t confined to individual developers. In 2020–2021, as interest rates worldwide fell to record lows, investors rode a buying frenzy, using cheap debt to bulk up their real estate holdings. Low interest rates were, in effect, handing everyone a pair of high heels. Then, as rates climbed sharply, those heels began wobbling all at once. Across 2025 and 2026 combined, an estimated $1.8 trillion in commercial real estate loans across roughly 7,000 assets worldwide are coming due for renegotiation or repayment.[1] The heels people bought in the low-rate era are now being tested against a high-rate world. In moments like this, the gap has always widened sharply between institutional investors who can refinance and the individual or smaller owners who can’t.

A similar story played out in Asia over the same period. One major Chinese property developer, having grown aggressively on borrowed money, posted massive losses in 2021–2022 and eventually entered liquidation proceedings in 2024.[2] The timing and the trigger differed from the West’s rate cycle, but the underlying structure was identical. Running in high heels, they tripped in a moment that left no room to trip.

Leverage isn’t always the villain

One thing shouldn’t be misunderstood here: leverage itself isn’t the bad guy. It’s precisely because of leverage that most ordinary individuals and companies can enter the real estate game at all. If buying a $1,000,000 building required having $1,000,000 in hand, the pool of people who could even join this game would shrink to a tiny handful. Letting someone become the owner of a $1,000,000 building with only $300,000 of their own money: that’s leverage’s proper function. Without the heels, plenty of people couldn’t even reach that eye level in the first place.

The real question is how high to set the heel. One common paradox of real estate wealth is that net worth can look large while most of it sits locked up in illiquid assets: buildings.”A million-dollar property is not a million-dollar savings account.” Leverage is also a temptation — the same capital lets you run two, three projects at once — and the more comfortable you get with that temptation, the more easily you slide toward banks demanding not just a personal guarantee but other assets as collateral too. Then, at precisely the worst moment, when the market collapses, every asset gets called at once, all pledged simultaneously. That’s the worst-case scenario excessive leverage creates.

Which is why the question seasoned investors ask isn’t “leverage or no leverage” but “can I handle this particular height of heel.” A heel so high that even a slight wobble in rent means missing the interest payment isn’t elegance — it’s a stunt. On the flip side, a heel too low (meaning barely any debt at all) is safe, but it means giving up the extra return that someone else’s money could have earned for you. DSCR (a metric for measuring a loan’s debt-service coverage, covered in a later chapter) is exactly the tool for calculating “is this the height of heel I can actually wear.”

How many centimeters of heel to wear

There’s no fixed answer for setting heel height. But there are principles. A stable asset with low tenant turnover — a logistics center under a long-term lease, say — has predictable cash flow, which leaves room for a relatively higher heel. An asset with volatile rents and high vacancy risk (a hotel, where prices can change by the day) is safer with a lower one. In practice, there are clear differences in customary leverage ratios by asset type: the more volatile the asset, the more equity the market conventionally tends to demand.[3]

And above all, the most common mistake is believing that the heel height set when rates were low remains just as valid once rates have risen. The pavement on the day you bought the heels and the pavement you’re walking on years later, wearing the same shoes, may not be the same road at all.

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Sources

• The mechanics of positive leverage and the equity-return amplification calculation: adapted from William J. Poorvu with Jeffrey L. Cruikshank, The Real Estate Game (Free Press, 1999)
• The recurring “the vision was right, leverage killed it” pattern in the Zeckendorf and Reichmann family stories: adapted from William J. Poorvu with Jeffrey L. Cruikshank, The Real Estate Game (Free Press, 1999)
• The structural mechanism by which undercapitalization and overleverage doom development projects: adapted from William J. Poorvu with Jeffrey L. Cruikshank, The Real Estate Game (Free Press, 1999)
• [1] Combined 2025–2026 commercial real estate loan maturities (roughly $1.8 trillion across roughly 7,000 assets): industry and contemporaneous public reporting (Mortgage Bankers Association / Trepp; Reuters; Bloomberg)
• [2] A major Chinese developer’s overleverage-driven crisis and 2024 liquidation: industry and contemporaneous public reporting (Mortgage Bankers Association / Trepp; Reuters; Bloomberg)
• [3] Customary leverage ratios by asset type (hotels highest at around 80%, apartments and industrial relatively lower): adapted from William J. Poorvu with Jeffrey L. Cruikshank, The Real Estate Game (Free Press, 1999)