I've never believed in advising or serving clients in the pursuit of something I haven't done myself, and so my wife and I have in recent years purchased, and now manage, our own cash-flowing (yes, even at today's rates!) leveraged investment properties in various markets of northern BC. Soon after my own forays started, I began helping interested clients, with some now owning multiple properties that I have captured for them at this point. And I love it!
How does it work?
*CAVEAT: there is of course much more to leveraged real estate investing than the below 'back of the napkin' explanations. I feel this is a very 'learnable', digestible and much more approachable way to build wealth than most folks believe, so my aim here is to perhaps demystify, and to encourage.
In a nutshell (IMO), you are using a bit of your own capital plus leveraged funds to secure a very large and most likely appreciating asset (the property) that contains within it a profitable housing business (the rental or rentals), where the profit in turn more than covers the cost of the leveraging (mortgage interest) plus any principal paid back. IE, the rental income minus all the expenses leaves more than enough left over to cover the mortgage payment AND leave you with some positive cash flow each month (cash in your pocket to either spend or re-invest).
NOTE: THE "INVESTMENT" IS NOT THE PURCHASE PRICE OF THE PROPERTY; THE INVESTMENT IS THE 'CASH UP FRONT', IE DOWNPAYMENT PLUS CLOSING COSTS PLUS ANY IMMEDIATE IMPROVEMENT/REPAIR COSTS. THIS IS THE AMOUNT WHOSE PERFORMANCE IS BEING MEASURED!
Your returns are earned and measured three different ways, two of which are reasonably reliable and forecastable (cash flow, loan repayment), and one of which is somewhat speculative (appreciation). Here's a further breakdown, based on a reasonable 'real world example' presuming a $350,000 property that earns $2,500/mo in rental income; typically, the investment here would be about $80,000 (20% down plus closing) plus leverage in the form of an 80% mortgage ($280,000, in this example);
1) Principal paydown: a mortgage payment is comprised of both interest and principal. So, if the payment is $1,500/mo (5% on a fixed rate with 30yr amortization against a starting principal of $280,000) and roughly $400 of this is going to principal, this example would result in roughly $4,800 of gain over a year.
2) Positive cash flow: presuming the monthly rental income is greater than the sum of the expenses plus the mortgage payment, you will have money left over. So, if the rental income is $2,500/mo and the expenses are $800/mo (items such as management, 1/12th of taxes, insurance, maintenance) and the mortgage payment is $1,500/mo, than $2,500 - $800 - $1,500 = $200/mo of positive cash flow, or a further approximately $2,400 of gain over a year.
3) Appreciation: this is the much more speculative portion of your return. If the market can reasonably, based on history and future indications, be forecasted to rise at roughly 3.5%/yr and the property was valued at $350,000, you will likely gain over $10,000/yr. IT IS VERY IMPORTANT TO NOTE that this is $10,000 earned, NOT on the property's value, but on your INVESTMENT, which is the downpayment and closing costs. EG, for this property if presuming downpayment was $70,000 (20% of $350,000) and closing costs were $10,000, the 'investment' that you're measuring the performance of is $80,000. Appreciation is the LEAST reliable source of profit... however, in the long run, it quite often ends up having been the most profitable.
So, let's summarize the above reasonable scenario; this opportunity, with an investment of just under $80,000, in a year earns roughly $4,800 in principal paydown, $2,400 in positive cashflow, and $9,000 in appreciation, resulting in approximate overall investment growth of around $16,000 (if NOT selling the property in this particular year we are 'measuring'). In this scenario, the overall rate of return (vis-a-vis stocks) would float around 14-16+% presuming a roughly 5-10yr hold, and your investment would double around the 5-year mark.