High risk = high reward. Generally, leverage is considered to be risky, but how sweet is its reward? Let's take a look at how leverage affects the return on a real estate investment, so we can adequately assess whether that risk is worth taking.
Let's take the following example and break it up into three scenarios: if an investor were looking to buy a 300k home in Colorado Springs as an investment, they could (1) pay cash, (2) put 20% down, or (3) buy a loan assumption with 5% down. For our assumptions, we will assume closing costs are $0 for each scenario for easier math, the interest rate for option (2) is 7.5%, and the rate for option (3) is 3.5%. These are based on currently existing market dynamics. Rent for the home is $1,900/mo and we'll set the expected annual appreciation at 4.5%, which is about average for the last few decades in CO Springs. We'll set aside CAPEX and maintenance reserves of 15% of rents, and assume vacancy will be 5% (CO Springs average for single family homes). Let's assume inflation will be 2.5%/year, affecting both rents and the cost of maintenance and CAPEX. 10% of rents will be taken out for property management, $1200/year in year 1 for property taxes (aligned with CO Springs average property tax rate of ~0.35% of the purchase price per year), and $1800/year for insurance.
Here are the prospective return profiles over the next 1, 2, 3, 5, 10, 20, and 30 years for each of the scenarios (for the columns going left to right)...
Scenario 1: Buy in Cash


Scenario 2: 20% down new investment loan


Scenario 3: Loan assumption with 5% down


Beyond the obvious differences in capital required to own a $300k home in these scenarios, from a sheer return perspective, there are stark differences. While your cashflow situation is better owning the home outright in scenario (1), scenario (2) gives us a better return. If, instead of buying one home outright, you bought 5 homes with $60k down for each, totaling a $300k investment to match scenario (1), you would make an extra $449k of profit over 30 years. For perspective, the return from scenario (1) is $1.398M, so you would have made 32% more profit by using leverage at today's mortgage rates. That's how big a 0.5% extra compounded return means over that period of time - the difference between scenario (1) and (2)'s IRR in year 30. IRR, for those who are wondering, includes cashflow, appreciation, and principle paydown on the loan. And this is not factoring in any sort of refinance to take advantage of better rates over the 30 years.
There are risks to using leverage, such as the lender calling your note due for not making payments, but you can mitigate that by simply making your payments. You'll notice the initial years carry negative cashflow for the leveraged scenario, which is another downside, but if you have cashflow from other areas of your life like a job, you could consider this expense to be like contributing to your employer's 401k plan on a regular basis - money that leaves your account before you have the chance to see it or are tempted to spend it. The ongoing financial maintenance of this scenario is worth considering, but $449k hangs in the balance. Over time, rents will grow as the mortgage payment stays the same, increasing cashflow to a positive position.
The decision between scenario (1) and (2) isn't cut and dry. There are trade-offs to consider for the extra return. This next scenario, however, shows the absolutely insane power of SMART leverage.
Let's say you were able to take advantage of a unique strategy that's essentially a clean "sub-to" deal called loan assumptions (there's a way to do them as an investment). If you could negotiate one of these (I've done 6 as of my writing this on 1/16/2025), and got a deal for 5% down and secured an incredible 3.5% rate, that's we're looking at in scenario (3). Now if you found 20 of them, you'd have invested $300k - the same amount as in scenario (1). And what does your return look like after 30 years? You would have made an additional $23.039M on top of the profit made in scenario (1). That's right... You would have a profit of $24.437M for your $300k investment today.
Of course, these are not the only options out there. If you're afraid of the negative cashflow, you could furnish the home and offer it as a short- or mid-term rental to increase your monthly take-home. You could also put 50% down to give yourself closer to neutral cashflow in year 1. These scenarios give you extremes in an apples-to-apples format so you can visualize the power of leverage in real estate.
The reason I got into real estate in the first place was because I learned how vital an extra 0.5% return is over a long time horizon. I figured if I could grow my investments even 0.5% faster than the average return of a stock portfolio, for instance, the compounded effect would allow me to retire a couple years earlier. It wasn't until early 2024 that I learned of these loan assumptions where your returns are literally 3-4 times the stock market's average. Why invest any other way? This is the wave to ride right now, but even when it's gone, the concept of leverage will remain.
I hope you learned something from this. If you have any questions about loan assumptions or how to execute them as an investor, please reach out! I love what I do and I'm passionate about maximizing peoples' investment dollars.