Rich people use debt to multiply returns on real estate. Buy a $200,000 house with $10,000 down and a 5% loan, and a 25% price gain becomes a 500% return on your actual cash. It's leverage: the bank's money does the work.
$200,000
$250,000
25%
5% (owner-occupied loan)
$10,000 (all in over 10 years)
Here's how the rich use debt to get even richer. Let's say you buy a house in cash for $200,000, like Dave Ramsey recommends. In 10 years, that house may be worth $250,000. So you made $50,000 on your original $200,000 investment. That's a 25% return. But by using debt, you can get a much higher return. So instead of paying cash, let's say you get an owner occupied 5% loan on that same $200,000 house. Now you only pay $10,000 all in in 10 years, that same house is now worth $250,000. Meaning you made $50,000 on your original $10,000 investment. That's a 500% return. So would you rather get a 25% return on your money or a 500% return on your money?
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