Using leverage to purchase investment properties

The Power of Leverage

This column is dedicated to teaching subscribers the principles of real estate investing, based on our personal experience and knowledge. Feel free to validate any of this information with your own sources.
Keep in mind we do not provide financial advice -- you should see a financial planner and accountant for that.
Some of North America's wealthiest men have said the following:

• "Real estate is the basis for all wealth."
  - Theodore Roosevelt
• "Buying real estate is the best, safest way to become wealthy." - Marshall Fields
• "90% of all millionaires became so through owning real estate." - Andrew Carnegie

So exactly WHY is real estate so good? In a word... leverage. Dictionary.com defines leverage as "investing with borrowed money as a way to amplify potential gains". How are potential gains amplified? Let's look at some examples. Example #1 - Buy a house with all cash

Purchase price	= $200,000
Down payment	= $200,000
Sale price	= $300,000
Profit	= $100,000
ROI	= Profit / Down Payment
	= $100,000 / $200,000
	= 50%

Example #2 - Buy a house with 25% cash

Purchase price	= $200,000
Down payment	= $50,000
Sale price	= $300,000
Profit	= $100,000
ROI	= Profit / Down Payment
	= $100,000 / $50,000
	= 200%

Example #3 - Buy a house with 10% cash

Purchase price	= $200,000
Down payment	= $20,000
Sale price	= $300,000
Profit	= $100,000
ROI	= Profit / Down Payment
	= $100,000 / $20,000
	= 500%

Notice that as the down payment is reduced, the return on investment increases. That is the power of leverage -- controlling a large investment with a small amount of money. While the masses are lucky to make 10% per year on their mutual funds, the wealthy are making triple digit returns and more with real estate.