The Real Estate Investor’s Guide to Debt

How to use leverage to scale safely—without losing your shirt.

Author

Dakota Crisp, PhD
September 01, 2025

In partnership with

Happy Labor Day, folks!

My last few letters have dug into the strategy behind real estate investing, but I’ve glossed over one of the most important factors: debt.

So today felt like the right time to talk about using debt to finance real estate plays.

This isn’t an exhaustive guide, but it’s everything I’ve learned from my own experience. My goal is to give you a clear framework for thinking about debt in real estate investing.

We’ll cover the two big categories of loans—residential vs. commercial.

Let’s get started!

Residential Loans (1–4 Units)

Most people are already familiar with residential loans (i.e., a mortgage). It’s the same thing you probably used to buy your primary residence. But they can also be used for investment properties.

For single-family homes and small multifamily properties (2–4 units), residential loans are your only option.

These loans are based on two things:

  • The price of the property (set by the housing market)

  • Your personal ability to pay debt (income, credit, debt-to-income ratio)

Believe it or not, you can have an unlimited number of primary residence mortgages, but there’s a limit of 10 financed properties once you include second homes and investment properties.

Upsides:

  • Lower interest rates than commercial loans

  • Fixed terms (15 or 30 years), giving you predictability

Downsides:

  • You’re personally responsible for the loan

  • They don’t play nicely with LLCs

My take: residential loans are great for beginner investors with solid income. If you want to scale quickly, stacking 2–4 unit multifamily properties with residential debt is one of the fastest ways to build momentum.

Residential Loans + LLCs

LLCs are important for real estate investing because they protect your other assets. But they’re tricky with residential loans.

LLCs can’t directly obtain a residential loan. You have to buy in your own name, then transfer the property into an LLC.

The catch: your lender can technically call the loan due if you do this without permission. In my case, I got approval, but the bank required me to rewrite my LLC operating agreement so I remained personally liable.

Refinancing adds another layer of hassle. Based on phone calls with three separate banks, you need to transfer the property back into your name, refinance, and then transfer it back into the LLC (again with permission).

It’s a pain, but worth it for the cheaper interest rates and asset protection.

Commercial Loans (5+ Units)

Once you step into 5+ unit multifamily, you’re in commercial territory.

Here, the bank cares less about you and more about the property’s cash flow. Lenders often require a 1.25x Debt Service Coverage Ratio (DSCR)—meaning the property must earn at least 25% more than its debt payments.

Commercial loan structure:

  • Higher interest rates

  • 5–10 year fixed terms, followed by a balloon payment

  • Expectation of refinancing (not full payoff)

This setup protects banks from interest-rate risk. But it creates risk for you—if you need to refinance during a downturn, you could see your property reappraised at half its previous value. That can force you to inject cash, cross-collateralize, or even lose the property.

Upsides of commercial loans:

  • Opens the door to bigger properties and economies of scale

  • LLC-friendly (your business entity, not you personally, holds the loan)

  • Enables forced appreciation

But make no mistake—the bigger the deals, the bigger the swings.

A Word on Forced Appreciation

With residential properties, value is tied to the housing market. With commercial, it’s tied to net operating income (NOI). That means you can directly increase a property’s value by raising income or reducing expenses.

Many investors use debt to buy a property, renovate it to improve rents, then get the property reappraised based on the new, stabilized income. At that point, they can refinance and pull out some of the additional equity they just created.

If you play your cards right, you can end up owning a stronger property and pull out more tax-free cash than you initially put into the deal.

Neat!

The Bottom Line

  • Residential loans give you cheaper debt, but you’re personally on the hook.

  • Commercial loans let you scale faster and use forced appreciation, but carry refinancing and operational risk.

For most beginners (and how I started), the sweet spot is residential debt on 2–4 unit properties. You get to scale faster than with single-family homes, use cheaper debt, and avoid some of the refinancing headaches of larger commercial deals.

Use debt wisely. It’s a lever—one that can accelerate your wealth, or magnify your mistakes.

This Week’s Affiliates

Swap, Bridge, and Track Tokens Across 14+ Chains

The Uniswap web app lets you seamlessly trade tokens across 14+ chains with transparent pricing.

Built on audited smart contracts and protected by real-time token warnings, Uniswap helps you avoid scams and stay in control of your assets.

Whether you're discovering new tokens, bridging between chains, or monitoring your portfolio, do it all in one place — fast, secure, and onchain.

CoreWeave gained 209%. We called it early.

Stocks & Income’s free daily investing newsletter sends you the breakout stocks before they go mainstream.

Here are some recent highlights:

✅ CoreWeave (before it soared 209%)
✅ Palantir (+441% this year)
✅ On Holding (+25%)
✅ Nova Ltd. (+13% so far)

And much, much more.

Read what we’re tracking next before it takes off.

With Stocks & Income, you’ll get AI stock picks, streamlined news coverage, key charts, and 1-sentence sector updates—all built to help you invest smarter and beat the market in 5 minutes per day.

It’s 100% free and delivered daily to your inbox.

Join 100,000+ smart investors receiving the breakout trades early.

Stocks & Income is for informational purposes only and is not intended to be used as investment advice. Do your own research.