With three elements - a good purchase price, positive cash flow, and leverage - real estate can provide fantastic long-term returns.

Let’s say you buy a rental property for $100 with $5 of cash and a fixed rate, 30 year loan of $95. Prior to buying the property, you calculate that you can safely rent the property out for more than your total carrying cost (mortgage payment, insurance, taxes, maintenance, vacancies, etc.). Further assume that the price of the property will appreciate in value by 3% over the long-term due to inflation.

After the renters have finished paying off your loan balance 30 years from now, the price of the property will be approximately $243, or $143 more than you paid.

But wait, your out of pocket cost was only $5. And that works out to an annualized return on investment of 13.8% a year for 30 years. If the property appreciates at 4% rather than 3%, your annualized return increases to 14.9% a year for 30 years.

And, it gets better. The largest portion of your carrying costs, the mortgage payment, is fixed, but your rental income is not. As long as you buy in a stable neighborhood, your rental income is likely to increase over time with inflation. Near the end of your 30 year loan, your rental income could easily be 2 to 3 times your monthly carrying costs.

In sum, you get the best of both worlds - a great rate of appreciation over a long period of time plus good cash flow. If done right, buying real estate can make you rich.