Let’s clear the air—debt isn’t the villain in your investment story. Used wisely, it’s more like the secret sauce that turns small investments into big wins. But like fire, it can warm your house or burn it down. The trick? Knowing how to handle it.
Real estate investing and debt go hand-in-hand. But we’re not talking about drowning in credit cards or gambling your future on a hunch. This is about leverage—how smart investors use other people’s money to build wealth, grow passive income, and scale portfolios faster than they ever could with just cash in hand.
So, what does “using debt wisely” really mean in real estate?
Good Debt vs. Bad Debt—What’s the Difference?
Not all debt is created equal. Some will pull you under, while others will push you forward.
Good debt makes you money.
Bad debt costs you money.
Here’s how to tell them apart:
- Good Debt
- Used to acquire cash-flowing real estate
- Backed by strong underwriting and projections
- Tied to assets that appreciate over time
- Comes with favorable terms and low interest rates
- Bad Debt
- High-interest consumer loans
- Unsecured debt without tangible assets
- Used for liabilities instead of income-producing assets
Bottom line? If the property pays you more than the loan costs you, you’re likely on the right track.
The Power of Leverage in Real Estate
Imagine buying a $1 million apartment complex. You could pay all cash—but why tie up that much capital when a bank is willing to finance 70%?
Using leverage:
- You only need $300,000 down
- You control a $1 million asset
- You earn income on the full value, not just your portion
That’s the beauty of smart leverage—it multiplies your buying power and your returns.
Visual: Leverage In Action
| Investment Scenario | All Cash | With Debt (70% LTV) |
|---|---|---|
| Property Value | $1,000,000 | $1,000,000 |
| Down Payment | $1,000,000 | $300,000 |
| Annual Net Cash Flow | $60,000 | $40,000 |
| ROI on Initial Capital | 6% | 13.3% |
Did your jaw drop? That’s what smart use of debt can do for you.
How to Make Debt Work For You
Alright, so you’re ready to embrace leverage. But you’ve got to treat it with respect. Here’s how to stay on the winning side of the equation.
1. Don’t Overleverage
It’s tempting to borrow as much as possible, but stretching too thin can sink you when market conditions shift. Keep your loan-to-value (LTV) ratio in a safe range—usually 65% to 75% for multifamily real estate.
This gives you wiggle room if rents dip, vacancies rise, or interest rates change.
2. Stress Test the Deal
Before signing on any dotted line, ask: “Can this property still pay the bills if things go south?”
Run conservative scenarios:
- 10% vacancy?
- Increased expenses?
- Higher interest rates down the road?
If the deal still cash flows under pressure, you’re in better shape to weather storms.
3. Match Your Debt to Your Investment Horizon
Taking out a short-term loan for a long-term hold? Not a great idea. If you’re planning to hold a property for 10 years, aim for long-term fixed-rate financing. If you’re flipping or selling soon, short-term financing may be okay—just keep your exit strategy tight.
4. Shop for Competitive Terms
Not all lenders are created equal. Compare interest rates, fees, amortization schedules, and loan covenants. A small difference in terms can mean a big difference in cash flow over time.
Don’t just look at the rate—understand the full picture.
5. Use Interest-Only Loans Strategically
Interest-only periods can improve cash flow early in an investment, especially during renovations or lease-ups. But don’t rely on them forever. They’re tools, not crutches.
Use that extra cash flow to:
- Build reserves
- Make improvements
- Increase property value
Once amortization kicks in, you’ll be ready.
Risks of Misusing Debt in Real Estate
Let’s not sugarcoat it—debt can get ugly if mismanaged.
Here’s what to watch out for:
- Negative cash flow – If loan payments exceed income, you’re bleeding money
- Balloon payments – Big lump sums due at the end of the loan can catch you off guard
- Variable rates – Your payment could skyrocket if interest rates rise
- Overpaying for the property – Even cheap debt won’t save a bad deal
The key? Be realistic. Base your numbers on facts, not hope. And always, always have a plan B.
Building Equity While Using Debt
One of the most underrated parts of using real estate debt wisely? Equity growth.
Each mortgage payment chips away at your loan, while your tenants pay the bill. Over time, your ownership stake increases—even if the property value stays flat.
And if appreciation kicks in? That equity snowballs even faster.
Add in forced appreciation from value-add improvements (like renovations, rent increases, or better management), and you’re not just sitting on a rental—you’re sitting on a wealth-building machine.
When Should You Pay Off Real Estate Debt?
This one sparks debates at dinner tables everywhere. But here’s the deal: if your debt is inexpensive and helping you generate strong returns, there’s usually no rush.
That said, you might consider paying down or refinancing when:
- Your LTV is too high
- Your interest rate is unattractive
- You want to boost monthly cash flow
- You’re preparing to sell or 1031 exchange
It’s all about balance. Use debt to grow, but don’t let it control your portfolio.
Leverage Can Unlock Passive Income
At Follow The Deal, we use strategic debt to scale smart, increase returns, and reduce risk. It’s one of the reasons our investors earn passive income without dealing with the headaches of active management.
And here’s the kicker—done right, smart leverage isn’t risky. It’s disciplined. It’s thoughtful. And it’s one of the most powerful tools in the real estate investor’s playbook.
Ready to use debt to build real wealth?
