When the cost of borrowing is less than the return earned on the investment, it is considered favorable leverage (or a positive carry). In opposite, when the cost of borrowing exceeds the return on the investment, it is termed unfavorable leverage (or a negative carry). An example of favorable leverage occurs when the operating return on a property exceeds the interest rate on the mortgage.
Leverage can enhance ROE by allowing investors to control a larger asset base with a smaller amount of equity.
Interest payments on debt are often tax-deductible, reducing the effective cost of borrowing. This is supported by the Internal Revenue Code (IRC) Section 163(a).
Leveraging allows for more efficient use of capital, enabling investors to diversify their investments and potentially reduce risk.