Levered vs Unlevered Returns: Which One Measures the Deal
By Devon Coombs, CPA, MBA · Assistant Teaching Professor of Finance, Santa Clara University · Reviewed October 2026
From the author: Devon Coombs, CPA, MBA teaches finance at Santa Clara University and works with corporate teams on practical AI.
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Use unlevered returns to judge the asset and to compare deals, because they strip out financing and answer whether the property is attractive at its price. Use levered returns to judge the equity investment as structured, because they reflect the loan terms the buyer will actually live with. A levered IRR above the unlevered IRR indicates favorable leverage, not a better building.
| Levered returns | Unlevered returns | |
|---|---|---|
| Cash flow stream | Equity at close, cash flow after debt service, sale proceeds net of loan payoff | Total cost at Year 0, cash flow before debt service, full net sale proceeds |
| Question answered | Is this a good equity investment under these financing terms? | Is this a good asset at this price? |
| What moves it | Asset performance plus loan proceeds, rate, amortization, exit balance | Asset performance only |
| Comparability across deals | Low; different capital stacks distort rankings | High; isolates the property from the financing |
| Risk | Amplified in both directions by debt | Property risk alone |
| Typical use | Sponsor marketing, waterfalls, equity underwriting | Screening, appraisal, deal-to-deal comparison |
When Levered returns is the right tool
Levered returns are the right lens once financing is real, because the equity outcome depends on loan proceeds, rate, amortization, and the payoff at exit as much as on the building itself. They drive waterfall hurdles, promote calculations, and the investor's actual cash-on-cash experience. The discipline is to read them next to the unlevered figure; when a 17 percent levered IRR sits on a 7 percent unlevered IRR, most of the headline reflects financing, and the refinancing risk that comes with it deserves attention.
When Unlevered returns is the right tool
Unlevered returns are the right basis for comparing opportunities and for testing whether an asset clears the required property-level return, because two identical buildings should not rank differently simply because one buyer borrowed more. Appraisers and institutional acquisition teams typically underwrite the property before the loan for this reason. A sound sequence is to settle the unlevered view first, then test how alternative loan structures move the levered outcome.
The common mistake
The recurring error is ranking deals by their marketed levered IRRs, which largely compares capital stacks rather than properties. Aggressive proceeds and interest-only periods can push a mediocre asset's levered IRR past that of a better asset financed conservatively, while adding refinancing and default risk the single number hides. Leverage magnifies performance in both directions; it does not create underlying value. Strip out the debt, compare unlevered returns first, and read the spread between levered and unlevered as the price of financing risk.
The same property decline creates a larger equity loss
- Buy a $1 million property using $400,000 equity and a $600,000 interest-only loan at 5%. Assume one year of $70,000 NOI, no capital costs and a sale after one year for $900,000.
- Unlevered cash received is $70,000 NOI + $900,000 sale proceeds = $970,000. Compared with the $1 million purchase, the one-year return is −3%.
- Levered cash received is $40,000 after interest + $300,000 after repaying the loan at sale = $340,000. Compared with $400,000 equity invested, the one-year return is −15%.
Assumes all cash is received at year-end; excludes transaction costs and taxes. Over this single period the return equals IRR. A multi-year IRR also depends on cash-flow timing. Debt magnifies the downside as well as potential gains.
Related question: Can refinancing fail even if interest rates fall?
References & further reading
Work the numbers yourself
Both concepts are taught in depth, with practice questions, in the free Real Estate Finance course.