“Living with fear stops us taking risks, and if you don’t go out on the branch, you’re never going
Sarah Parish
to get the best fruit.”
From a young age, we often assume that owning is better than borrowing. We’d rather not borrow a friend’s bike, but get our own shiny, brand new one. When it’s time for a school dance, the hand-me-down dress your friend’s mom offers might save your parents a few hundred dollars, but the new ones hanging on the rack hold greater appeal. Yet, as we get older and wiser, the benefits of borrowing start to appeal to our common sense: why buy a book when a free copy is available at the neighborhood library? If your next-door neighbor offers you use of his power washer, might it make sense to use it instead of running out to buy a new one? Before buying your kids a puppy, it might not be a bad idea to dog sit for friends for a week or two to find out how much your kids really want to walk, feed, and clean up after a much-begged-for pet.
There is also wisdom in borrowing when it comes to real estate investment. In fact, the dictionary definition of leverage reflects this wisdom and positivity: to leverage borrowed capital is to “expect one’s profits to be greater than the interest payable.” While borrowing might involve a bit of risk, it also positions the investor in the position to produce the best fruit.
The fear of borrowing money can be dispelled when you stop to do your research and realize that using borrowed funds from the bank actually is the key to investing sooner and with more vigor than the slow and tedious process of saving enough of a down payment to go alone.
For example, let’s imagine you were to save and purchase, without borrowing any funds from a bank.
Purchase Price: $1,000,000
Net Operating Income (NOI): $75,000
Capitalization Rate: 7%
Annual Rent Increases: 3%
After 5 years, your NOI is $84,413. If you sell at the same 7% Capitalization Rate that you purchased it at, the sale price would be $1,200,000.
The following table shows your Return on Investment (ROI) from your rent:

In this example your ROI from the sale would be 20% – that’s your sale price of $1.2 million with your original investment of $1 million subtracted.
Thus, without borrowing from a bank, your total profit is: $200,000 (appreciation) + $398,185 (cash flow) = $598,185, and the total ROI is $598,185 / $1,000,000 = $59.82%
Now instead, imagine you were able to invest sooner by using a bank loan for $800,000 with a 20% down payment of $200,000 at a 5% interest rate, amortized over 20 years.
Compare the table below with the one above:

In this example, the ROI from the sale is $1.2 million -$667,640 (remaining debt) – $200,000 (original investment) / $200,000 x 100% = $166.18%
So, with the help of the bank, the total profit comes in at $332,360 (sale price – debt & original investment) + $81,408 (cash flow) = $413,768. And the Total ROI is $413,768 / $200,000 = 247.59%.
To compare: without the help of a bank, the ROI is 59.82%, but by borrowing wisely the ROI is much greater at 247.59%.
Experience and data work to dispel the myth that borrowing is bad. In fact, those who truly want to maximize their returns, understand the rewards far outweigh the risk of using a bank to borrow. The power of leveraging is in the freedom it allows you to invest sooner, diversify your funds, and pursue higher quality properties.
To get the best fruit, release your fear of borrowing and climb out onto the branch that is extended to you.
Ready to get started? Contact us.