Even if she sells at fair market value, the real estate broker's commission will wipe out most of the positive return. Therefore, she has paid more for the use of the borrowed money than she has made through the sale. Some sellers must actually bring cash to the closing to pay off the mortgage in a reverse-leverage situation. Whereas a small down payment increases the potential for huge returns from positive leverage, it also increases the risk of reverse leverage because the amount of debt being carried is great. In good times, real estate leveraging has made many fortunes.
Some investors refinance a property as soon as the value rises significantly.
They take out the accessible cash and use it as a minimal down payment on another property. When those two properties rise in value, these investors refinance again and buy again, building their holdings from two houses to four or more. And as long as the economy keeps expanding and financing is available at good rates, they can continue to build their investment pyramids. This is absolutely legal. Understanding leverage is one of the most essential keys to success in the investment real estate marketplace.