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How to Calculate Debt to Equity Ratio in Real Estate

Jerry Norton

Apr 10, 2024

windowpanes at the building

You've been told that all debt is bad, right?

The truth is not all debt is created equal.

What if I told you that today's top real estate investors use debt to their advantage to acquire properties they otherwise wouldn't be able to?

It's true!

But how much debt is too much debt?

That's where debt to equity ratio in real estate comes in.

Debt to equity ratio in real estate can help you understand your risk before buying an investment property. Or, if you already own an investment property, the ratio can help you understand your current level of risk relative to the cash you have invested.

If you're ready to learn everything you need to know about debt to equity ratio in real estate, keep reading!

What is Debt to Equity Ratio?

Debt to equity ratio in real estate is a measure of how much debt a given investment property has in relation to its equity.

This provides insight into the level of risk that comes with the property.

How to Calculate Debt Equity Ratio

The debt to equity ratio is calculated by dividing the total debt by the total equity:

Total Debt / Total Equity = Debt to Equity Ratio

In the formula, debt refers to any borrowed funds used to finance the property, such as mortgages or loans, and equity represents the your cash investment in the property.

Debt to Equity Ratio in Real Estate Example

For example, if a rental property has a total debt of $500,000 and a total equity of $1,000,000, the debt to equity ratio would be 0.5 or 50%.

This means that for every dollar of equity invested, there is 50 cents of debt.

What is a Good Debt To Equity Ratio in Real Estate? 

While it can depend upon the property, a good rule of thumb is that it’s healthy to have at least 70% debt and 30% equity or 2.33:1.

High Debt to Equity Ratio 

A high debt to equity ratio indicates that the property is heavily financed with debt and has lower equity investment. In the event of a change to interest rates or a downturn in the economy, you and your investment could face risk.

For example, if you own a duplex with a high debt to equity ratio a tenant moves out, and you can't find a replacement for a few months, will you have enough to cover your mortgage, or will you be overleveraged? 

If something requires significant maintenance during your ownership, will you be able to afford repairs, or will you be stretched too thin due to high interest rates?

Low Debt to Equity Ratio

On the other hand, a low debt to equity ratio indicates a higher proportion of equity capital relative to debt and is much safer during times of economic instability or high interest rates.

That being said, properties with a low debt to equity ratio often yield lower investment returns.

The Bottom Line: Debt to Equity Ratio in Real Estate

There you have it: debt to equity ratio. 

By using it, you can give yourself a clear picture of risk associated with a property — and help your next real estate transaction potentially be the most profitable one yet. 

Looking for additional real estate formulas to help you make wise investing decisions? Check out our guides to Gross Rent Multiplier, cash on cash return and price to rent value.