Disclaimer: When it comes to finances i generally agree with dave ramsey's advice of avoiding debt (except for a mortgage to buy your own personal home) and to only buy things you can pay cash for aka afford. So since i'm generally anti debt, i wasn't familiar with the concept of increasing the return of an investment (ROI) utilizing debt until a good friend introduced it to me recently. And while in some cases it's definitely possible to boost your investment returns utilizing debt (and i show you how in just a second) i would still advice against it in most cases. Why? Because it also boosts your chances of loosing money or even - depending on the situation - going bankrupt. I'm also not a financial advisor so this is merely my personal opinion and not to be seen as financial advice. You have to do your own due diligence when making investments and you're the only one responsible for the outcome of such investments. Now with all that said, let me explain the theory behind own capital + debt = higher ROI than own capital alone...
Lets say you're looking to invest 100k of your own capital and the investment return is 10% after 1 year. This means that after 1 year you made 10k profit and now have 110k total.
But now lets say you make a bigger investment where your own 100k is only 50% of the total investment sum. So you take out a 5% interest loan to fund the other 50% of the investment. This investment also returns 10% after 1 year. At this point you would have invested 100k of your own money + 100k of the banks money (5% interest loan) for a total investment of 200k with a return of 10% after 1 year. 10% return on a 200k investment is 20k. But you have to subtract the 5% interest on the 100k loan which is 5k for a total profit of 15k.
Result: In this scenareo your ROI would've been 10k without the use of debt and 15k with the use of debt. Utilizing debt you made 5k more on the same amount of your own money (100k) and in the same timeframe (1 year).
Now lets go even bigger. Let's say your 100k is only 20% and you borrow the other 80% (400k) of the total investment sum. Your interest rate is still 5% and your investment return is still 10% after 1 year. 10% return on a 500k investment is 50k. But you have to subtract the 5% interest on the 400k loan which is 20k for a total profit of 30k.
Result: In this scenareo your ROI would've been 10k without the use of debt and 30k with the use of debt. Utilizing debt you made 20k more on the same amount of your own money (100k) and in the same timeframe (1 year).
Conclusion
When utilizing debt it's not only possible to do bigger investments. The examples above proof that it's furthermore possible to get a much higher ROI when utilizing debt (and with that while paying interest) aswell. Since risk is also much higher, i suggest you only do this if you can EASILY (meaning it's not or almost not affecting your life) cover the full amount (own captial + loan) with your own equity in case something goes wrong. If you can't afford or don't want to risk loosing you should not invest with borrowed money IMHO.
Reason being: Investing with borrowed money IS always high risk. No one can forecast the future. Just think about 2008, covid 19 etc. If you still want to take your chances, make sure to have the best possible odds, a good margin of safety and a fixed interest rate for as long as you need to pay off the loan assuming everything goes as planned. (Preferably longer) Obviously low interest rates (that do not eat away your additional profits) are essential for this to work aswell. At time of this writing (08/2023) you might struggle to find cheap enough credit. But not long ago it would have been very easy.
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