What leverage actually is
Why would I borrow if I could pay cash?
3 minute read
Leverage is using someone else's money to control more than your own money could. It multiplies whatever happens next — in both directions.
The comparison people miss is not “debt versus no debt.” It is the return on the money you put in versus the return on the money you kept.
Same 10% gain, two structures: $100,000 in stocks that rise 10% earns $10,000, a 10% return on your capital. That same $100,000 as 20% down on a $500,000 property that rises 10% produces $50,000 of gross appreciation — 50% on your invested equity, before interest, taxes, insurance, maintenance, vacancy, transaction costs and risk.
That is the whole argument for leverage, and the same math is the whole argument against it. A 10% drop cuts the stock position by $10,000 and the equity in the leveraged position by $50,000 — while the loan payment continues either way.
Mini tool
Same gain, two structures
What a move in value does to your own cash, unleveraged versus leveraged. Before interest, costs, taxes and risk.
Why this matters
Once you can see both directions of that multiplier, “debt is bad” and “debt is free money” both stop making sense.
What to do with this
- For any borrowing decision, write down the return on YOUR cash, not the return on the asset.
- Then run the same math with the number going down instead of up.
Want this applied to your own numbers?
Ask CredABLE about this