Real estate appreciates at 4% (on average, but let's say it's constant for the sake of argument). I buy a house that costs $100,000. My down payment (cash out

Real estate appreciates at 4% (on average, but let's say it's constant for the sake of argument). I buy a house that costs $100,000. My down payment (cash out of pocket) is $20,000. I pay 3.5% interest on $80,000 as I'm paying down the loan, plus property taxes and insurance, and it comes to $546.74/month [1]. The rent comes in at $550/month, pretty much canceling out the mortgage. Am I making 4% per year on my investment, then, because that's the amount the real estate appreciates? No, I'm making 4% of $100,000 per year, or $4,000, on my $20,000 investment. That's 20% per year. [2][3] Leverage properly applied can raise your net profit. You're welcome. [1] http://www.mortgagecalculator.org/ http://www.mortgagecalculator.org/ [2] The numbers can realistically be much better than this, given the right circumstances. I am personally using this as an investment strategy, and yes, it doesn't just work this way "in theory." [3] I'm ignoring repairs and vacancy rate for simplicity. Those obviously hurt profitability. But as I mentioned in [2] above, if you pick your investment property strategically, your margins are much higher, so that's your cushion.