When you mortgage a home as an investment property, you are leveraging your money 5-1 (on a 20% down payment)
If rent covers 90% of the mortgage, you still make an absolutely huge profit amortized over the loan.
If you consider the tax incentives (interest write off, depreciation, capital gains deferment, pass through deduction) the gap in the rent can be covered.
Consider paying 50k down on a 250k house, the. Paying an additional 15 percent over the life of the loan (around 40k) to cover for gaps in rent.
Over the life of the loan you turned 90 grand into 250 grand (and a house is an appreciating asset, so it will likely be worth more than 250 by the end of it all)
Deduct depreciation (value of the home minus land value over 27.5 years) and carry over losses can even make up for the gap of rent you pay entirely over time.
This is exactly the kind of math that normal people don’t get when it comes to this conversation. Every industry has some convoluted, obscure, non-intuitive way to actually make money when it doesn’t sound like you should. You have to think in different ways and in longer terms.
Even then though, it’s not as amazing as it seems. Real estate is not the only sector that can make profits on leverage. In fact, pretty much any publicly traded company relies on leverage and debt. If you buy a share of an index fund, you’re buying shared of companies, most of them taking advantage of the same leverage you would when buying a rental property.
But basically no broker is going to give you a million in margin on a 200k account, and you don’t get margin called on mortgages (typically) the way you do with margin accounts.
