Levered vs Unlevered Returns: Which One Measures the Deal
By Devon Coombs, CPA, MBA · Teaching Professor of Finance, Santa Clara University · Reviewed August 2026
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.
Work the numbers yourself
Both concepts are taught in depth, with practice questions, in the free Real Estate Finance course.