Quick Take — Leverage is one of the most misunderstood tools in real estate investing. Used with discipline, it amplifies after-tax returns, preserves capital efficiency, and creates structural advantages that few other asset classes can replicate. Used carelessly, it turns a manageable market correction into a permanent loss of capital. The difference between the two outcomes is not luck — it is the quality of the manager’s leverage framework, and knowing how to evaluate it.
Leverage is a Tool, Not a Strategy
When advisors and investors ask us about leverage, the concern behind the question is almost always the same: excessive borrowing has amplified nearly every major real estate downturn in modern history. That concern is legitimate. But it conflates two very different things — the existence of leverage and the discipline with which it is applied.
The question investors should be asking is not whether a manager uses leverage (virtually all of them do) but how they use it, and whether that framework holds when market conditions make discipline expensive.
The rate environment that has characterized the last four years has made this question more consequential than it has been in a generation. The Federal Reserve raised its benchmark rate from near-zero in early 2022 to a peak of 5.33% by mid-2023 — a 533-basis-point move in roughly eighteen months, the fastest tightening cycle in decades. Rates then declined modestly through 2025 before stabilizing in the 3.50–3.75% range, where they have remained through mid-2026. With May 2026 CPI running at 4.2% year-over-year1 and market expectations reflecting the possibility of further tightening and the path of monetary policy remaining uncertain, the era of cheap, forgiving debt is not returning anytime soon.
That environment separated managers who had a genuine leverage discipline from those who had simply been operating in a favorable rate cycle. Bridge loan distress, forced recapitalizations, and impaired preferred equity positions across the industry all trace back to the same root cause: debt structures that were not built to survive a rate shock of this magnitude.
The Market Risk Questions that Matter Most
Evaluating a manager’s leverage framework begins with market risk — specifically, how the debt structure interacts with the rate environment and the asset’s cash flow profile. Two questions cut to the heart of this.
Fixed vs. Floating: Where Does the Rate Risk Live?
The distinction between fixed-rate and floating-rate debt is not a technical footnote — it is one of the most consequential structural decisions a manager makes. Fixed-rate debt locks the cost of borrowing for the duration of the loan, insulating cash flows from rate volatility regardless of what the Fed does next. Floating-rate debt adjusts with market rates, which amplifies returns in a declining rate environment and compresses or eliminates them when rates rise.
The 2022–2023 cycle made this painfully visible. Managers who leaned heavily on floating-rate bridge loans watched debt service coverage ratios deteriorate as rates climbed — not because the underlying assets were failing, but because the debt structures were never designed for that environment.
Investors evaluating a manager’s leverage approach should ask:
- What percentage of the portfolio is fixed-rate?
- For floating-rate positions, are rate caps or interest rate swaps in place, and at what strike?
- Were those hedges structured at acquisition, or added reactively?
A manager who builds rate protection into the underwriting model before a deal closes is demonstrating a fundamentally different risk culture than one who addresses rate exposure after the fact.
Negative Leverage: When Borrowing Hurts
A more sophisticated and increasingly relevant concept is negative leverage. Negative leverage occurs when the cost of debt exceeds the cap rate on the property. This means that borrowing actually reduces the investor’s return rather than amplifying it. Cap rates compressed to historic lows in 2021, and the sharp rise in debt costs since has become a real constraint on value creation.
A disciplined manager underwrites both levered and unlevered returns on every acquisition and will walk away from a deal when the spread between cap rate and debt cost makes leverage value-destructive.
Execution Questions That Separate Good Managers from Great Ones
Market risk questions reveal whether a manager understands leverage in theory. Execution questions reveal whether that understanding translates into portfolio discipline in practice.
Target Leverage and the Hard Cap
The most basic execution question is deceptively simple: what is the target leverage level, and what is the ceiling? There is a meaningful difference between a stated target and a hard limit. A manager who targets 60–65% loan-to-value (LTV) but has no documented ceiling is operating on a guideline, not a constraint. A manager who targets 65% LTV with a hard cap at 70–75% has built a structural guardrail into the investment process.
Equally important is the gap between policy and reality. Investors should ask for the current leverage ratio across the portfolio — not the target — and understand why any divergence exists. A fund that targets 65% LTV but is running at 72% due to lease-up assets or market conditions carries a different risk profile than its stated policy suggests. Transparency here is both a data point and a character signal.
Debt Duration and the Business Plan
Beyond the leverage level itself, how debt is structured relative to the investment timeline is equally consequential.
A construction loan on a ground-up development carries a fundamentally different risk profile than a 30-year fixed-rate mortgage on a stabilized asset. The relevant question is whether the debt duration is matched to the expected hold period and business plan. A floating-rate construction loan with an 18-month maturity on a lease-up asset that will take 24 months to stabilize creates a refinancing cliff — a point at which the manager must secure new financing regardless of market conditions, often at terms that are less favorable than what was available at origination.
Investors should ask how debt maturities are distributed across the portfolio and whether any near-term maturities coincide with assets that have not yet reached stabilized occupancy. A portfolio with staggered, well-matched debt maturities is structurally more resilient than one with a cluster of loans coming due in a compressed window.
Accountability: What the Track Record Actually Shows
The most reliable test of a leverage framework is not the policy document, it is the behavior of the portfolio when conditions deteriorate. The 2022–2024 rate cycle provided exactly that test, and the results across the industry were uneven. The following example is from Origin’s own portfolio and illustrates how this framework was applied in practice. It is not intended as a comparison to any specific manager or fund.
The Rate Hedge That Changed the Outcome
In January 2022, before the Federal Reserve had completed a single rate hike, our Co-CEO David Scherer brought a proposal to our Investment Committee: purchase $18 million in swaption contracts, derivatives that function as insurance against rising interest rates, to protect the portfolio from what he believed was an impending and significant rate increase. Some committee members pushed back. The capital, they argued, might be better deployed directly into real estate. Scherer’s background as a former interest rate derivatives trader gave him a different vantage point. The committee agreed to proceed.
What followed is now documented. The Fed moved aggressively, the cost of debt surged, and the swaptions generated over $43 million in total gains that were deployed directly to offset higher interest costs across our funds. We also executed forward-dated interest rate swaps on $500 million of debt, locking in the cost of future financing before rates moved further. The Wall Street Journal called the move “audacious” and noted it was “virtually unheard of” for smaller, privately held real estate firms to employ derivatives this way.2 Our response was straightforward: it wasn’t a bet — it was good risk management. We believed that taking no action to hedge the portfolio’s rate exposure would have been inconsistent with our obligations to our funds and its investors.
Where Manager Experience is a Differentiator
The swaption trade was a tactical response to a specific risk. The preferred equity pivot was a strategic one — and it is the decision that has most durably shaped the IncomePlus Fund’s risk profile.
In 2022 and 2023, as cap rates expanded and multifamily valuations fell sharply, we made a deliberate choice: reduce common equity exposure and concentrate the portfolio in preferred equity positions. The reasoning was structural. Preferred equity sits senior to common equity in the capital stack, meaning preferred equity investors receive distributions and return of capital ahead of common equity holders, and common equity absorbs losses first, protecting preferred equity from impairment until common capital is exhausted. In a market where common equity was bearing the full weight of declining valuations, preferred equity’s contractual return and repayment priority offered a layer of downside protection that common equity structurally could not provide.
The Portfolio Pivot That Protected Capital
Most open-end funds maintained heavy common equity allocations through this period, leaving them directly exposed to valuation declines and cap rate expansion. The IncomePlus Fund’s open-end, evergreen structure gave us something closed-end funds with fixed mandates do not have: the flexibility to shift capital stack positioning dynamically as market conditions changed. We used it.
Today (as of 7/31/26), preferred equity represents 48% of the fund’s portfolio, the largest allocation, followed by 43% in common core-plus equity, 7% in ground-up development and lease-up assets, and 2% in cash. The portfolio leverage ratio was 57.4%, and the debt service coverage ratio was 1.06x as of July 31, 2026, based on Origin’s internal portfolio reporting. These figures reflect the fund’s current capital stack positioning, including its concentration in preferred equity positions, which carry contractual return and repayment priority senior to common equity. This positioning reflects both the original thesis and an ongoing conviction: in an environment where leverage risk remains elevated and the path of rates is uncertain, contractual seniority is worth more than the incremental upside of common equity exposure.
Results Against the Peer Set
The combination of proactive rate hedging and a deliberate preferred equity concentration produced results that are visible in the benchmarking data. As of July 31, 2026, the IncomePlus Fund has outperformed our private real estate peer set average across the 1-, 3-, and 5-year periods. The 3-year period, which captures the full weight of the 2022-2024 rate cycle, reflects a 5.9% outperformance versus the peer set average.
Trailing 1-Y
Trailing 3-Y
Trailing 5-Y
Origin IncomePlus Fund
-2.3%
3.5%
5.7%
Peer Set Average
5.7%
2.3%
3.8%
Blackstone Real Estate Income Trust
11.2%
4.3%
7.0%
Hines Global Income Trust
6.9%
4.6%
5.4%
Nuveen Global Cities REIT
3.4%
2.8%
5.2%
Starwood Real Estate Income Trust
-1.0%
-2.8%
1.1%
Brookfield Real Estate Income Trust
7.4%
1.2%
4.9%
JLL Income Property Trust
5.0%
0.1%
2.9%
KKR Real Estate Select Trust
1.5%
-1.6%
2.1%
FTSE Nareit U.S. Real Estate Index – All REITs
11.0%
9.7%
1.8%
As of 08/31/2026. Returns are for the INV share class. Actual individual investor performance may differ based on share class. Total Origin IncomePlus Fund returns reflected are net of fund fees and assume monthly reinvestment of distributions. Non-traded REITS reflect eight of the industry’s largest non-traded REITs that provide publicly available performance reporting. Origin has not separately verified accuracy of the performance data with each third-party issuer. Returns are not guaranteed. Past performance is no guarantee of future results. All investments involve a degree of risk, including the risk of loss.
The 3-year figure is where the preferred equity thesis is most legible. While the peer set averaged just 2.0% over the trailing three years — the period that captures the full weight of the rate shock — the IncomePlus Fund returned 5.9%. The difference is not attributable to market selection or asset quality alone. It reflects a capital stack strategy that was designed to hold through exactly the conditions that materialized.
What to Ask Before You Invest
- What is the actual portfolio leverage ratio today versus the target?
- What percentage of debt is fixed rate? For floating-rate positions, what hedges are in place and at what strike?
- How are debt maturities distributed, and are any near-term maturities on assets that have not yet stabilized?
- How did the portfolio perform through the 2022–2024 rate cycle? Were distributions maintained? Were any assets recapitalized?
- How are leverage metrics reported on an ongoing basis? Are they reported as actuals or targets?
The answers to these questions will not tell you everything about a manager’s leverage discipline. But they will tell you whether that discipline exists and whether it held when conditions made it costly to maintain.
The rate environment ahead remains uncertain. The Fed has held rates in the 3.50–3.75% range through mid-2026, and while the probability of a near-term cut has receded, the path forward is not clear in either direction. What is clear is that the era of forgiving, low-cost debt is not returning on any near-term horizon. In that environment, leverage discipline is not a differentiator, but a prerequisite.
We would be happy to walk through our specific leverage framework, debt structure, and portfolio metrics in further detail. Reach out to our Investor Relations team at any time.
Interests in the Origin IncomePlus Fund have not been registered under the Securities Act of 1933, as amended, or the securities laws of any state, and are being offered and sold in reliance on exemptions from the registration requirements of such laws. Any investors will be required to be ‘accredited investors,’ as such term is defined under the rules and regulations promulgated under the Securities Act. This material does not constitute an offer to sell or a solicitation of an offer to purchase any securities. Any such offer or solicitation will be made only by means of a confidential private placement memorandum.
Sources
- U.S. Bureau of Labor Statistics, Consumer Price Index Summary, June 2026
- The Wall Street Journal, “Chicago Property Developer Scores With Audacious Interest-Rate Bet,” Feb. 14, 2023. Origin did not pay any fee to The Wall Street Journal in connection with this coverage.
