What Investors Should Consider Before Using Leverage to Build Their Real Estate Business

by | BiggerPockets.com

I have a lot of my customers ask me about leverage. Should they use it? How much should they use? My answer is always, “It depends.” As a matter of fact, I think that is my answer to more than half the questions that are posed to me. I can’t answer that question in a vacuum. There are too many variables to be able to answer that with any certainty. What I can do is tell you my position on having debt and the questions that you need to answer to be able to figure that out for yourself.

I personally hate debt, which is ironic considering how much debt capital I use. I have both private money loans and bank loans. I find it a necessary evil at this point of my career. Maybe I rationalize it to myself, but to be a full time investor requires me to have a substantial amount of working capital to be at a scale that makes what I do possible.

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Funding My Real Estate Projects

My current amount of cash on hand does not allow me to move at my current pace or allow me to keep up with the demand I have selling properties to other investors. So, I borrow short term private money to fill that gap, but my whole intention is to get to the point of self-funding.

Related: To Leverage or Not to Leverage? Why the Answer Isn’t as Simple as You Think

I am a little bit more flexible in my view of certain bank debt. There is only one reason I have flexibility in taking on bank debt (and this certainly isn’t all bank debt)? The term. I have less issues with fixed rate fully amortizing debt on cash flowing properties. The only problem is, as a full time investor, it is very difficult to find, if you can at all.

Using Debt Wisely

So why do I hate debt? I hate it because you are a slave to it. No matter what happens, you need to make that payment. Rents didn’t come in? Too bad, you need to make that payment. You lost your job? Too bad, you need to make that payment. The more debt you take on, the bigger the burden of that payment. The bigger that burden, the greater the risk that everything you’ve built comes crashing down.

So, when I talk to an investor and they ask about debt, I ask them, “Why are you buying the property?” If you are buying the property because you want to be a full time real estate investor, that is different than if you want passive income. After knowing that answer, I ask them what their cash position is.

Finally, I ask what their experience level is. Typically, what I have found is that 40-50% of the people I talk to have no cash and want to be in real estate and have no experience. I find this to be the scary group. If you are comfortable risking mom or dad or sister or aunt or grandma’s money on something you have no clue about, that is a problem.

This means you’ll risk anyone’s money and you are a poor fiduciary. This is what I say to them: If you are looking to be in the real estate business, you may need to take on debt. It is ok, but always understand what your out is. Don’t get caught standing if the music stops. You may not be able to expand as quickly as you’d like, but you won’t have to worry as much about going broke.

Related: Used Wisely, Debt Can Absolutely Produce Wealth: Here’s How


If you don’t want to be in real estate and you are just looking for cash flow, take on as little debt as possible.  Sure, it reduces your returns. But the reason you get greater returns is because you are taking more risk. You have to be selective on where you take your risk financially. Don’t open up yourself to unnecessary risks if you don’t have to.

Debt is just a tool. Overusing it can create big problems and big headaches for you. If you are going to use it, make sure you have cash on the sidelines to be able to afford debt payments if the unexpected happens. As for me, I can’t wait until the day that I don’t need to take on debt.

Investors: How much debt are YOU willing to take on?

Let’s talk in the comments section below.

About Author

Mark Ainley

Mark Ainley is founder of GC Realty and Development and GC Realty Investments. Mark has been an active real estate investor since 2003. He started slowly by flipping condos and acquiring a couple of investment properties. Since 2003, Mark and his team have successfully renovated and stabilized over 200 properties.


  1. Can take lots of debt, but only with positive cash flow, fix rate,25 yr loan long term. Let NNN credit tenant pay the rent.
    Bought Walgreens in 2010, could get 105% loan !!!, now may be 97% loan. But need to put money down, 15% to get 5 % cash on cash in retirement. Also, buy property where land is cheap, this way more depreciation. You see anything wrong here? Thanks

  2. Ndy Onyido

    As long as it casflows, leverage is good. And for most investors, this is the only way to go to grow your portfolio significantly
    Debt is good if it brings in income and that is the beauty of real estate investment

  3. Andrew Syrios

    Debt is a great tool, but it’s a dangerous one. Good article! If you buy right, then you have insulated yourself from the risks of leverage because if the market goes down, you still have equity. But if you buy wrong and do it with leverage, you have nothing to fall back on.

    • Jon Wanberg

      I totally agree! Buying right is the key and allows you to hedge against the danger. If something goes wrong, you can unwind without getting stuck.
      Buying too high doesn’t allow a cushion for a way out when the market changes or the unexpected happens.
      Great comment Andrew Syrios.

  4. John Teachout

    At this point I have no debt in any area of my life. I am not anti debt but just don’t like the power it has over the one that owes it. My current real estate strategy is to buy fixer upper single family homes to refurb, hold and rent. I have a broad variety of construction skills so can do all the repairs myself and gain equity by investing sweat equity. The biggest hold up in our investment plan is the rate that we (wife and I) can repair the properties. By the time we get what we already own fixed up we should have adequate funds for another one. I’d like to add about 6 more properties over the next 8 or 9 years.

  5. Ayodeji Kuponiyi

    I’m willing to take on enough debt that can be paid down by the rental income. Like most I don’t want to over leveraged and take on too much debt, however I accept debt as a part of doing business and as a part of life. Most of aren’t born into wealth and even the fortunate few that are born with silver spoon have learn to use debt to attained more wealth as oppose to using all their own capital.

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