Real estate leverage can turn a modest gain into outsized returns. Buy a $200,000 house that appreciates to $250,000: paying cash nets 25% return, but borrowing at 5% and putting down $10,000 turns that same $50,000 gain into 500% return on your actual cash invested.
$200,000
$250,000
$50,000
25% ( $50,000 gain on $200,000 investment )
5% owner-occupied loan
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?
Physicians and High Earners — What Real Estate Can and Can't Do for Your Taxes
