Consider this for residential real estate investing:

Imagine there was a stock you could buy that pays a 5% dividend or so. (cap rate)

Imagine this business provided a product/service that literally everyone needs.

Imagine the product/service this business provides is on back order for a decade. (low inventory)

Imagine this stock was historically significantly more stable than the S&P 500 Index.

However, this stock typically appreciates meaningfully less than the S&P 500, but because of it's reliably predictable appreciation, the banks would lend you up to 80% of the value of this stock at a fixed interest rate slightly higher than inflation to purchase it.

Imagine if rates dropped, you could replace that loan with a new, lower interest one?

Imagine there were all sorts of tax benefits for doing this.

Due to the ability to leverage this asset, collect income, enjoy preferential tax treatment, and expect appreciation over time, historical returns on money invested are regularly and meaningfully higher than the S&P 500 with dividends reinvested.

How much would you buy?

Wouldn't it be a great if you could purchase this stock so that the 5% dividend covered the cost of the payment to the bank? What?!

What if it didn't quite? What would you do?

Would you borrow less? Like 70% instead of 80%, just so the dividend would cover your payment to the bank? Maybe. That's a good strategy.

Or would you borrow 80% still, and pay the difference each month for a few years? Maybe, if you were very confident in your ability to pay this. After all, you figure you're still getting the ownership of this stock for a fraction of the overall value.

Furthermore, you recognize that the 5% dividend on an increasing value is an increasing dollar figure, so eventually, the dividend will entirely cover the payment to the bank. And, eventually, you will receive the entire dividend with no payment to the bank because the loan is paid in full.

Or would you walk away and complain that you used to be able to purchase this stock with 20% down (an arbitrary number, by the way, based on PMI, not the bank's concern for your entitlement to positive cash flow) and the dividend would cover your entire payment and then some in the first year? Maybe… at least you're in the comfortable majority. It's not a good deal anymore, right? Better to wait, expect, and feel entitled to bank rates that are unrealistically low and not likely to return in our lifetimes.

What would you do?

This is not a perfect analogy. Here are a few caveats…

Real estate is not fungible, so it matters which real estate you buy. You can't be careless about it - you have to do your due diligence.

Real estate is also not passive. Anyone who says it is doesn't own any. You're a business owner when you buy rental properties. However, in exchange for more responsibility, you also get a lot more control over your investment than in a traditional stock, where your only control is to own it or not.

Real estate is a concentrated asset. With a small amount of money, you can have a diversified portfolio of stocks. Diversifying with real estate takes a lot more capital.

Lastly, I am not recommending negative cash flow. But it is true that if values rise, the more intelligent debt you use, the better overall return you'll achieve, even if your cash flow is negative. And if a few hundred (or thousand) dollars a month is no big deal to you, and your objective is aggressive returns, then negative cash flow in favor of higher leverage can make sense. That said, negative cash flow should be considered very cautiously. Liquidity is a metric every business and investor should regard as sacred.

I'd love feedback and insight on this idea! I am a retired financial planner (more like disenfranchised), and I deliver a lot of CE courses to RE agents and their clients in Colorado, and I'm always thinking of helpful ways to explain real estate and financial concepts. I woke up at 4:30 this morning with this idea in my head, and I had to write it down and get the BP community feedback - I love this platform! Thank you to anyone and everyone who shares ideas!