I'm not a Real Estate invetor, but I can explain this from that perspective since I studied it for a while. Leverage is the concept of using ohter people's money, or other people's efforts to achieve profits. Let's say you own a company that invests in Real Estate. Take one deal as an example. You find a house that sells for $100,000 and you plan to make $20,000 in improvements. You use $20,000 of your own company's money as the down-payment and borrow the remaining $100,000 from the bank. You buy the house, and make the improvements. Now the house is worth $150,000 and you sell it for that. You have a $30,000 profit. What is your return on investment? Well, you only used $20,000 of your own money, and you got $30,000 in profits, so you made a 150% real return on your investment (you had to make payments while you did the work, but I'm not including that, just to keep it simple). But you took three months to do the work (1/4 of a year), so your return on investment (ROI) which is calculated in years, is actually 150% TIMES four, or 600% ROI, because if you did this again (with the same $20,000 every three months, your investment is only $20,000 total, yet you made $120,000 in profits (600%). This is an extreme example, and not very realistic, but it shows the principle. If you took the same example, and instead of borrowing the money, used all of your own, ($120,000: $100,000 to purchase, and $20,000 to improve), your return on investment is still $30,000, but now you have to divide that into $120,000, which gives you 25% REAL return, or 100% ROI. Not bad, but if you have the $120,000 to begin with, and leverage, instead of using your own money, you can buy six houses every three months and profit $180,000 every three months, or $720,000 still at a 600% profit. Now just take the original "company" money, and make it "stock holder's" money, and you get the picture. That's what Donald Trump does. Then he also leverages the efforts of those who do the actual work on his buildings, often paying them with borrowed money, while he sits in his office, planning the next deal. Pretty cool job huh? (I don't care for Trump, but since Real Estate is the easiest example to use to illustrate this, he was an obvious choice) I just read through what I wrote, and realized it looks really confusing, but it's right. Break out your calculator if you have to. Leverage is a very important concept in business.

If you look at the debt/equity ratio and consider leveraged firms vs. unleveraged firms, the amoutn of net income and retained earnings is higher for leveraged firms, given similar criteria in peer groups. If you look at Miller-Modigliani I and II, there is a tax shield, or a tax incentive, for corporations to have debt - basically, they are given a tax break if they are leveraged. Of course, every firm has the proper level of debt/equity as the cost of maintainig debt and equity depends on each firm's capabilities, in terms of return on assets (ROA) and return on investments (ROI), working capital (just in case some *&#@ happens and you need to meet these short term liabilities quickly, and also Current ratio (how easily a firm can meet short term debt obligations), and other things like yearly or quarterly increase in sales/revenue/income. Debt generally increases the value of a firm and helps to take on differnt kinds of projects that they normally woudn't have been able to. However, the viability of projects are also taken into consideration - i.e. risk/return of projects and payback period or discounted cash flow to understand if project is reallyw orth it. etc. hope thsi helps.