Cash Flow vs. Equity: Which Pays Off for Investors in the Long Run?

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As I’ve been searching for topics to write about, in terms of finance and real estate investment are concerned, I keep running across the different ongoing conversations regarding equity and cash flow. Specifically, which one is better and why? I thought this would be a good topic to analyze from a financial perspective, especially in terms of residential investment property.

Let me present to you a story that I often use for comparisons regarding owner occupied purchases and how to handle refinances for rate/term improvements or cash out refinances down the line. I use the story to help clients compare small vs. big down payments, making the scheduled payment on your property or paying more, getting a long term mortgage (like 30 years) or a shorter term mortgage (15 years), and the reasons why you should consider these different options every time you get financing for property.

(Note: I’ve tailored this situation for an investment property using a duplex rather than a single family house.)

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The Scenario: 2 Cousins

OK, so let’s set the stage here for our analysis. In this scenario, we have two cousins who are going to buy a duplex. The price of each duplex is $250,000. Each duplex is exactly the same, consisting of two 2 bedroom/1 bathroom units. Each cousin will live in one unit and rent out the other unit to a prospective tenant. Each cousin is employed in a salaried job and makes $75,000 per year in income. Each cousin has $50,000 in savings. Let’s also assume that each of the cousins was able to negotiate zero out of pocket closing costs (for the sake of this analysis).

Cousin A

Cousin A is a highly motivated individual and wants to pay off the property as soon as possible. Cousin A only knows one way to use financing, and that’s the way that his parents taught him how to do it: Put down as much money as possible and finance as little as possible. Cousin A is going to put down 20% because that’s what his parents did when they bought their home, and he’s going to get a 15-year fixed, which will allow him to pay off the property in just 15 years.

Then, on top of that, any cash flow that is achieved by renting out the second unit should be put toward the monthly mortgage payment, and Cousin A might even be able to pay it off faster than 15 years. Cousin A wants to build as much equity as possible and as fast as possible, while at the same time paying down the mortgage as fast as possible. The duplex is kept up, and it appreciates at 3% per year.

Cousin B

Cousin B is also a highly motivated individual, but he grew up on the other side of the country. His parents didn’t teach him much about finance, so he had to study it on his own. He’s come to the conclusion that he’s going to do exactly the opposite of what Cousin A is going to do. He’s going to take as long as possible to pay off the mortgage, and that means getting a 30 year amortization on his mortgage loan.

Related: Equity Rich and Cash Poor: A Real Life Case Study on How I Saved My Mother’s Home

He’s going to put as little down on the property as possible, and in this case, it’s only 3.5% with an FHA loan. He’s going to save the difference in monthly mortgage payments ($302) and put that in his savings. Just as in Cousin A’s duplex, Cousin B’s duplex is kept up, and it appreciates at 3% per year.

The Initial Numbers

Here’s what each cousin’s scenario looks like today when they are purchasing the identical duplexes.

Cousin A Cousin B
Purchase Price: $250,000 $250,000
Down Payment: $50,000 $8,750
Loan Amount $200,000 $241,250
Interest Rate: 3.75% 4.00%
*Monthly Payment: $1787 $1485
Difference in Monthly Payment: $0 $302
Equity: $50,000 $8750
Cash after Down Payment: $0 $41,250
Rental Income: $1500/mo $1500/mo
Cash Flow -$287/mo +15/mo
Appreciation 3%/year


For the next five years, everything goes as planned for both Cousin A and Cousin B. The renters seem to be long term. The rent hasn’t gone up or down, but at least it has been consistent. The property is most certainly worth more 5 years later, so they’ve both built a little equity in the property. They still have consistent income, so nothing seems to be wrong as far as monthly payments are concerned (except the fact that Cousin A has to pay a little bit every month, whereas Cousin B actually makes a few bucks every month).

The Numbers in 5 Years

Here’s where the cousins are at after 5 years:

Cousin A Cousin B
Duplex Value (5 years): $289,818 $289,818
Loan Amount (5 years) $145,355 $218,204
Loan Amortization: 15 years 30 years
Interest Rate: 3.75% 4.00%
Monthly Payment: $1787 $1485
Difference in Monthly Payment: $0 $302
Equity (5 years): $144,463 $71,614
Savings $0 $59,370
Equity + Savings: $144,463 $130,984
Rental Income: $1500/mo $1500/mo
Cash Flow -$287/mo +15/mo
Appreciation 3%/year 3%/year

Finally, at year 7 into the process, something happens. Cousin A loses his job, and since he put such a large down payment down on the property in order to “pay the property off faster,” he has absolutely no savings (also because he had negative cash flow). The renter in Cousin A’s duplex decides it’s time to move out, and he no longer has income coming in from the rental. I would call this a “rainy day” event because it’s a major malfunction of the system at this point in time.

Coincidentally, the same exact thing happens to Cousin B. He loses his job, and the renter in his duplex also decides to move out at exactly the same time as the renter with Cousin A.

The Numbers After 7 Years

Here is where each stands after 7 years financially.

Cousin A Cousin B
Duplex Value (7 years): $308,339 $308,339
Loan Amount (7 years) $120,468 $207,618
Loan Amortization: 15 years 30 years
Interest Rate: 3.75% 4.00%
Monthly Payment: $1787 $1485
Difference in Monthly Payment: $0 $302
Equity (7 years): $187,871 $100,721
Savings $0 $66,618
Equity + Savings: $187,871 $167,339
Rental Income: $0/mo $0/mo

This is where the situation becomes divergent. Since Cousin A has no more income whatsoever because of the job loss and rental income loss, he’s forced to make a tough choice. Either he can’t make his mortgage payment or he’ll have to sell the house. Most likely, he’ll have to sell the duplex to get his equity.

Cousin B, on the other hand, is totally good with where he stands financially after the job loss and the tenant loss. He can make the mortgage payment for many years with just his savings alone. He can take his time to find a tenant who fits the mold of exactly what he’s looking for. And he’s got the cash to cover expenses that he may run into for a while.

The End.

Now, I know there are several variables in this story that may or may not happen. I give you this story to illustrate a few points about residential investment real estate, real estate finance, and money in general.

Here’s my take:

The Takeaway

Cash vs. Equity

Cash is liquid money and is absolutely essential when you finance real estate. Cash is much easier to use if something goes wrong, whereas equity is completely useless. You’d have to sell your asset if you ever need the money quickly, and that is not always the choice that someone needs to make if an event occurs.

Value vs. Financing

The value of a residential property will go up or down regardless if you have a mortgage on the property. Value is completely out of your control in residential real estate because it’s usually based on someone’s opinion instead of cash flow (like commercial real estate). This is an important point when investing. Since mortgage money is the cheapest money that you’ll ever borrow, why not finance as much as possible?

If the numbers don’t work for the smallest down payment possible, move on to the next property. Remember, a good investment property is one that cash flows to your liking, not one with “equity.” That is to say that the income generated by the property is greater than the expenses of the property.


Related: Should I Invest for Cash Flow or Growth? An Investor’s Analysis

Smaller Down Payments vs. Bigger Down Payments

This goes along with reason number one. Nobody cares about equity unless you’re trying to determine your “net worth.” And net worth is as useless as the “g” in lasagna. So, when given the choice of putting down a lot of money or a little money, put down a little money and either save or invest the rest. Leverage is key. Use other people’s money (in this case, the bank’s money) to the best of your ability. Don’t put more money into a property to try and generate a cash flow. Just move on to the next one.

Long Term Mortgages vs. Short Term Mortgages

Remember, when you’re financing an investment property, you can always pay more, but you can NEVER pay less. Leverage is key here. A shorter term mortgage means that your payment is going to be higher — period. Regardless of the interest rate you’ve obtained on your short term mortgage, it will be more than a longer term product, even if the longer term product has a higher interest rate. Every single dime, nickel, or penny you give to the bank is money that you’ll never get back unless you refinance (borrow against the house as collateral) or sell. Those are usually major transactions.

As you look through the ideas listed above, realize that this is what commercial real estate investors do all day long. Commercial real estate is so much more about the numbers of a given property rather than emotions or opinions, like residential real estate is.

Challenge yourself to find a cash flowing residential property that enables you to make a small down payment, get a long term mortgage, and spend as little of your own capital as possible. The cash flow that you achieve will most certainly be better than the equity you’ve gained.

We’re republishing this article to help out our newer readers.

What do you think: Do you agree with my points in the cash flow vs. equity debate? If not, what’s your counterargument?

Leave your comment below, and let’s discuss!

About Author

Jeff Trevarthen

Jeff Trevarthen is a mortgage advisor at New American Funding, a direct lender in 48 states across the US. With 12+ years in real estate finance, Jeff is an expert at coming up with creative loan solutions for all types of residential real estate loans.


  1. Matt Aspen

    Thank you, thank you, thank you … finally, a concise, short & CLEAR comparison of the “two schools of thought”. I share the view that cash is precious; its VERY hard to save up and ‘goes’ very quickly.
    For those of us, like myself, who are new investors, there is a residual fear of borrowing. I don’t think we need to debt ourselves needlessly (ie. get that fancy new car vs. get a quality, used ride).
    The major shift in my thinking has been to use leverage, saving the cash flow to invest further.
    Great write up!

  2. jon rylander

    Great post Jeff! I like how you used two people and put their scenario’s side by side to make it easy to see the differences. I am in the process of buying my first rental property which is a duplex in St. paul MN and my bank would only finance it if i put down 20% but the property only costs $80,000. Would it be smart to try to avoid Mortgage insurance (PMI) by putting down 20% and decreasing your monthly payments for higher cashflow??

    • Jeff Trevarthen

      It sounds like you’re buying the duplex as a complete non owner occupied property. Depending on how your capital on hand looks and if you can make the property cash flow with the MI, I may think about putting less money down. MI is usually a percentage of the loan amount and for a loan that small, I’m guessing that the change in payment isn’t going to be very much. Hope that helps.

      • Vaughn Black

        OK, here’s where I, as a new investor, become slightly confused. Any bank I am aware of will only do an investment mortgage (as in one for a rental property) with 20-30% down. I am not aware of any bank in my area of Pennsylvania that will do a Low down payment, Non-owner occupied mortgage. So how can anyone get a 30 year mortgage on a rental unit or units without a huge down payment up front? Thank you

        • Cassi Justiz

          Go to your local BP or REI meet up and ask around. I was told by multiple people that banks in my area would only do a mortgage with at least 20+% down. At my first meetup I met an investor that knew of a tiny local bank that would carry 90% of the note and another loan broker that will finance 100% if he thinks it’s a solid enough deal. I havent gotten to try them out yet, but my next purchase will definitely be with one of those guys.

  3. Luis Roa

    Good article, Jeff. Nice side by side comparison.

    One thing to point out is that in your example there is a difference of $20,532 between the 2 alternatives, in favor of the one with higher downpayment at the end of the 7 year period. That difference is the result of paying a lower interest in the borrowed money (3.75% vs 4.00%), and having a higher portion going to the principal. This last one due both to having higher monthly payments and a faster amortization due to the shorter mortgage (15 years vs 30 year).

    These 2 result in “giving less money” to the bank. (to the tune of $20K in 7 years)

    One can view this as the “price to pay” to get the flexibility that lower payments and “cash in hand” for emergencies (like the one in your example) give to the owner. And, for RE investors, it also gives the ability to get a higher rate of return (but assuming the ability to get a much higher rate of return on the money is not part of your example)

    An alternative way to have the same flexibility (at a much lower cost) is to secure an alternative means of accessing cash and only trigger that when an eventuality such as the one in your example happens. For example, getting an Equity line of credit (several of which require no payment to setup), or a zero interest offer on a credit card, etc. In this case, you have the ability to tap into the money when needed, but you don’t pay interest for that ability. Obviously, you can only set that up when the times are good, not when you are in dire straits (and without a magic crystal ball, you don’t really know when is the good time)

    The point is though, that there are alternatives to “locking” ithat 20K difference at the very onset of the journey. And some of those alternatives give you a similar flexibility when the problems come.

    Life events, choices one makes, ability to rigorously maintain a plan (e.g. not using the HELOC for other expenses, etc.), vary a lot in real life. And one can’t really say which one of the alternatives would be better in 100% of the cases. (By the way, the probabilities of which of the alternatives would come ahead can be studied using a technique called Montecarlo analysis).

    But again, the analysis you did in the article is more to go: hmmm! and just see different options, and to know what’s possible in some specific scenarios, not so much to select an alternative that is always a winner.

    Good and interesting article.


    • Darin Anderson


      You make a good point about lines of credit. While my two rules listed below means I always get maximum loans and make minimum payments for as long as possible, I also have a few properties that I own free and clear that have lines of credit on them. I use those lines to buy properties, then either take out long term mortgages and pay off the line or take another line on the newly acquired property. With the lines of credit I am also always pushing for the maximum line they will give me. If I can’t get at least a 75% line I won’t bother. I am not going to tie up a property for 50% financing. That would violate Rule #1 about getting as much money as they will give you. Someone will give me more than 50%.

      The great thing about lines is you can pay them down and then draw them back out again when needed. I always like to have a couple lines of credit in my back pocket to help manage the financing options.

    • Jeff Trevarthen

      Thanks for the detailed comment Luis. There are definitely plenty of variables that can be manipulated in the above example and one of them is the equity plus savings like you noted above.

      If, in the example, it were my money, I would not have it savings, but would most likely have it in paper assets with the help of a great financial advisor. The paper assets are more liquid than having the money in real estate equity. That is to say that I’d try to compound the money more so than just the savings account.

      There may be some banks out there who do loans for people that are unemployed, but I haven’t seen many. Most, if not all, want you to have the ability to pay it back in residential and that means having a job.

  4. Darin Anderson


    The argument you make lines up very well with my 2 Rules for Financing. There are many things to consider when getting financing but I focus on these 2 Rules at the expense of all others:

    Rule #1: Get as much money as they will give you.
    Rule #2: Get that money for as long as they will give it to you.

    This simply means I always seek the highest Loan to Value ratio the bank will allow (and I push for higher if I think I can convince them to go there) and I seek the longest term and amortization schedule possible (and I push for higher if I think I can convince them to go there).

    I have done this about a dozen times now, never regretted it once. The reason I have the funds to do this over and over again is because of strict adherence to these two rules.

  5. When I read this title, I thought more of variable of property location. I have a condo that is rented and has great cash flow but has actually depreciated about 25% over the 20 years that I have owned it. I have a row house that we purchased at about the same time and for about the same price in a up and coming area. It has had the rent double and the value triple in that same period. Lots of wealth to be made by buying and holding in the right place. That is what we are concentrating on now. Appreciation can be a more powerful tool than cash flow/

    • Jeff Trevarthen

      If you can predict the market, cash flow AND equity definitely possible. I have found that investing in markets that are known to be appreciating creates a sellers market and you end up paying more for a property than in the lesser known areas where investors are looking at cash flow.

      Take for example, San Jose, CA. The average appreciation in my market is about 25% per year for the last 2-3 years. If you tried to buy now, you’d be crazy as the values are so ridiculously inflated, but if you bought 3-4 years ago, you’d be sitting pretty with the appreciation and cash flow with increasing rents.

      Great point Gene. Thanks for commenting.

  6. Roy Gutierrez

    Great article Jeff! As a newbie investor I made the mistake of getting a mortgage for 15 years and a cash out for 10 years on my own home! I feel like printing this article and putting it on the door to not even feel tempted to make these mistakes again! Thanks!

  7. Benjamin DeLeon

    Another two things you are forgetting in favor of cash flowing properties.

    1. Tax benefits
    The 30 year loan results in more interest and this allows greater tax write offs. These are real cash benefits you will see each tax season.

    2. Time value of money
    The cash you keep in savings should receive some sort of return. I know in the bank it won’t earn much, but the money in your pocket today should be worth more in the future. It needs to appreciate at some rate.

    • Be careful when talking about tax writeoffs around mortgages. They are only a benefit in a certain income range, and then they are completely removed as a deduction. I would not count them at all in a comparison unless one is just getting started and in a lower income bracket.

  8. troy whitney

    Jeff I agree, though I find myself looking for a combination of the two, low-cost properties with relatively high rents in “up and coming” areas (not war zones). I’m realizing that with some of these, cash flow is quite high and property values can increase significantly. Here’s a great video that is quite remarkable about a guy that focused on such high cash-flow properties for the long haul, and the results will make your jaw drop:

  9. Gregory Hiban

    Hmmmm a mortgage broker who owns no investment property of his own is telling everyone that the smartest way to invest is to lever themselves up to their eyeballs in debt … 2006 all over again?

    You need to analyze one variable at a time and hold all else constant.

    First, you should compare 15 year vs. 30 year mortgages. I am preferential to using 30 year mortgages but making a few big payments up front that essentially turn it into a 15 year mortgage with cashflow flexibility. Having a debt sit there for 30 years is absurd.

    Second, you then need to compare a 20% downpayment vs. a 3.5% down with PMI to determine if equity is better than money in the bank. Given that Cousin A is making $75K and now living almost rent free, he could easily build up his cash stores after the 20% downpayment and have both equity & an emergency fund. You saying that he will put every dollar he makes to pay down the mortgage is just taking things to the extreme to justify an absurd argument. Both would have ample cash to survive a job & tenant loss. Not to mention, unless this duplex is in one of the worst markets in the country, you can replace a tenant in absolute MAX three months & a job in six months.

    You sold your argument decently because you put some nice charts up, but the underlying assumptions are incredibly flawed.

  10. Kyle Hipp

    I still work my “day job” so my time is increasingly stretched as I acquire more properties. I intend to retire from my day job in the next 10 years for sure, Most likely sooner. I finance all my properties with little to nothing down mainly because I end up putting the cash of a down payment into the property through improvements. When I finance, I amortize over 15 years. As I said earlier, I have limited time and need only the nest deals that will cash flow very well even on a 15 year amortization. The interest rate is lower as you showed and the Tax deduction savings that someone else mentioned is not a smart path for me to spend a $1 to the bank to get back $.25 from the government. I’ll keep the $1 and pay the $.25 to the government… Another benefit of a 15 year mortgage is that as you grow portfolio lenders, private money, and commercial notes prefer shorter amortizations. I also find it easier to qualify for more financing on other properties by my LTV on my existing properties being excellent and moving quickly. The last thing is that like another gentlemen mentioned that you didn’t include PMI on cousin 2. I think most banks would provide a line of credit on the property with 35% ltv compared to 60%+ as well.

    At the end of the day I believe it depends on your goals. I want to be able to have several properties all but paid off by the time I retire so I can have a higher cash flow at that time. And also tap the equity with a line of credit based on that equity. From that point I might get longer amortization mortgages but like I stated earlier that most financers would like 15 year notes with a larger amount of properties.
    Nice look on the topic 🙂

  11. You’re not entirely wrong but some things are overly simplified. Equity isn’t “useless”. The entire scenario is skewed towards the first guy not having any reserves and guy B not spending any of his extra money, which are both silly. People focusing on paying down mortgages would have HELOCs or rent insurance as back up.

  12. Scott Stevens

    If the numbers don’t work for the smallest down payment possible, move on to the next property. Remember, a good investment property is one that cash flows to your liking, not one with “equity.” That is to say that the income generated by the property is greater than the expenses of the property.

    ^^^^ I liked that line a lot. Pretty similar to Ben Leybovich’s philosophy. Something I wish I’d have known earlier on, but you learn more everyday that you stay in the game. I have three townhouses, first was financed 100% on a 30year. Provides the cash in case something goes wrong.

    Second one was non-occupied, 20% down on a 15 year mortgage. That 20% downpayment just sits there. It’s nice to see I’m paying down just over $400 in principal every month, but the money is just sitting there. If the house dropped in value, that equity disappears.

    Last townhouse was a 30 year mortgage with 5% down. It makes the most sense to run the numbers with 100% financing and see where you stand after that. Anyone who saves up enough cash (not hard to do) can buy equity and make it appear they are cash flowing, but I don’t consider that smart investing. Wish I used the same philosophy before buying property number two.

    • Here, I have to disagree. You cannot honestly believe that equity is entirely useless. Suppose, hypothetically, I gave you two options: Option 1 is the status quo, and Option 2 is commit to paying an extra $1/month on your mortgage for 2 years, and you will be given a cash award of $300,000 after 2 years. Would you do it?

      Of course the answer is “yes”. Now what about if the award was $150,000? Would you still do it?

      How about $30,000? $10,000? $2,000?

      What is your point of indifference?

      Ultimately there is some price you are willing to pay for some equity, and the proportion that would make you, the rational agent, indifferent, is NOT zero.

      The question you need to ask yourself is what you think would be a fair trade to make you indifferent, and compare that to the actual options to decide.

      An unwillingness to do that by insisting on always getting the longest loan possible, is something that can only be true as a rule of thumb, not an axiom.

      To insist otherwise is the result of either intellectual laziness or closed-minded dogma.

  13. Eric D.

    An interesting analysis would be where one had a bad tenant and was forced to go without any cash flow for a period of six months while a an eviction, a rehab and new tenant was found. Both cousins could keep their job, and neither one has any extra to put into the deal.

    The one with the better cash flow would win. Of course, anyone who would buy a negative cash flow property is a fool (unless you are actually living in one side for nearly free). Or an investor who is under capitalized is also a fool.

  14. Hugh M.

    Kyle Hipp is right on with his take above, I don’t know that I could say it better. You mentioned leverage being key and it is…… and it’s why many, if not most “real estate investors” fail…. by being overly leveraged. I believe in never taking more than a 15yr loan on anything, if you need more time, you can’t afford it. Also, you’re going to save more than 1/4 point taking a 15 vs 30, it’s more likely to be 3/4 or 3.25 vs 4. True cash flow starts when the property is debt free. That’s not to say you need to put as much down as possible or put all your additional income toward the principal but it’s a great idea if you’re in a financially stable position.

    • Hugh M.

      Wait, wait, wait. Did I miss something? I understand cousin A has negative cash flow but are we to assume that he makes no payment beyond the $287 difference between rent income and mortgage payment? He makes 75k per year, so 28% of his monthly income is 1750 which makes the $1787 mortgage payment easily affordable. Since he is determined to pay it off as quickly as possible, add that $1500 per month in rental income toward the mortgage and the property is paid off in 6 years and 5 months. So, at year 7 when he loses his job, his house is not only paid for, he has $21,678 in savings from the last seven months of not having a $1787 ($1454 after paying $333 in tax/insurance) mortgage payment and earning $1500 in rent. That’s more than enough to cover the $333 per month in taxes/insurance while he looks for a job and finds another tenant.

    • David duCille

      15 yr mortgages are great, I have one on my primary residence. But if you are a novice investor starting out and you have some of the normal fears associated with real estate, you can mitigate that by having lower monthly payments and increased cash flow and build up reserves. Then when you get on solid footing its easy enough to pay more towards principal and reduce your term

  15. Mark M.

    This is my first comment. Came across this from the weekly newsletter.

    Obviously you can’t predict the future. Bottom line is cash is king especially when the unexpected happens. And you should always prepare for any situation whether it is a repair or damages or vacancy or even loss of income. That said, it’s been my experience that I rather have a positive cash flow than a negative one.

    Of course, it does depend on where the property is located and whether you finance it or not. But having a strategy in place for the unexpected so you know how much cash you have on hand will eliminate such concerns. It is a good idea to have a rule of thumb for keeping a minimum of X months holding costs (insurance, utilities, mortgage, etc….) in the event of the unexpected.

    The Great Recession was a major unexpected event many REI owners did not prepare for and should serve as a reminder for owners to respect cash as the king of the land.

  16. That’s a great article Jeff, It really illustrates one benefit of holding a cash reserve.

    One thing that is missing though is the massive difference in the return on each parties investment.

    Cousin A after 5 years has a return of 94 % in the example, based on his Modus Operandi, whilst Cousin B, who took the long term Higher leveraged option has a ROI of 956%.

    If anyone is interested in the workings of this , then please feel free to Inbox me.

    Many thanks


  17. Brian Jurvelin

    Hi Jeff,

    I really liked the article, I would also add the money you saved with a smaller down payment could go towards purchasing a second rental property and doubling your cash flow. That is the power of leverage.
    When I clicked on the article though I was expecting you to take the topic in a different direction. I am in the “educate yourself” phase of my budding real estate investing career and wondering which types of properties I should be focusing on. I live near Detroit so I have a wide range in the quality of markets I can pursue. I am trying to decide between buying properties with excellent cash flow but without much potential to add value due to low appreciation potential (i.e. low GRM/high cap rate areas) or buying properties with more potential to add value due to higher appreciation potential, but that have smaller, but still positive, cash flows (i.e. high GRM/low cap rate areas). I will be staying away from “war zones” either way and will be pursuing 2-4 unit multi-family properties. What are your thoughts?

  18. Darren Sager

    I don’t think Cousin A should have bought the property with negative cash flow and Cousin B is missing the PMI payment however it was a good article none the less. It goes to show you how to use money more effectively and has opened my eyes a bit. Thanks Jeff for coming up with this insightful article for us!

  19. This is really a straw man, because prudent investors who get the shorter loan would have an emergency fund for just this kind of situation. At most you have argued for having an emergency fund, not for stretching the loan out.

    And I agree that you should have an emergency fund.

  20. Ethan Pope

    Hi Jeff,
    Can you explain the monthly payment amounts in your initial numbers comparison chart? From looking at the numbers, it appears that Cousin A should have a lower monthly payment than Cousin B.
    Cousin A: $200k loan; 3.75% Interest Rate; Monthly payment $1787
    Cousin B: $241K loan (higher than A); 4.40% Interest Rate (higher than A); Monthly payment $1485 (lower than A) Please explain why Cousin B monthly payments are lower than Cousin A when his loan and interest rate are both higher? What am I missing? I noticed an * next to monthly payment, but did not find any notes explaining the *. But, maybe I missed something. Appreciate your help. Thank you.

  21. Eddie Ziv

    One thing to consider as an investor is your age. It is one thing when you investing in your forties or even early fifties, and it’s a different consideration when you are close to retirement and planned to rely on that income as part of your pension. For me, the goal is for all (Or at least most) of my properties to be free and clear of any debt by the time I retire. Why? Two reasons: 1. Utmost cash flow of course, 2. Any problem, like an economic downturn, or a long term tenant leaving when the property needs renovation, etc. When you are retired and on a fix income, the last thing you want to worry about is the need to pay mortgage while your property doesn’t provide income which you partially rely on.
    I have 8 properties, six of them have been fully paid, two others carry mortgages, but will be free and clear in 4 and 6 year respectively. The total valuation of my properties is over $800K and the liabilities are about 10% of that. I am 62.
    I do agree though, with those who spoke in favor of equity line of credit. Always good to have for a rainy day.

  22. Paul Lindow

    My approach has been quite a bit different, but I am in a different market. I am in a market where I can buy single family homes for $40k, rehab them for $25k and get an appraisal of $120k. I pay cash for the home. When finished I am able to cash out refinance it at $80k. My cash flow allows me to pay for the rehabs as I go. I take the $80k and buy two more. I hold on to each property for cash flow. I am gaining $40k in equity with each one. This allows me great leverage. It also allows me to cash out quickly if I get into a bind. I am 56 years old and have been semiretired since 50. I get 20 or 30 year mortgages and don’t try to pay them off sooner. I have a line of credit based on one of the homes that allows me to cover emergencies.

    If cousin A had a line of credit based on his equity, it would have allowed him to make his payments during the time he looked for a job and got a new renter. I would have had him use his equity and savings to purchase a second duplex. The cash flow off of that would really change your chart.

    Great article. Gets people thinking, discussing and learning.

    • Amber Porter

      There are always different ways to look at the two scenarios which is why return on investment seems to help with comparisons. Look at your ROI and how your initial $40K has returned! That is great! I feel like cousin B’s investment has provided a better return than A’s. But it still depends on your circumstances.

  23. David South

    Project this to year 15 and assume the cousins didn’t lose their jobs (even if they did, the cousins should have been saving money from their day job so if they ever lost a job they wouldn’t have to sell the place).

    How much more money is Cousin A making, relative to Cousin B, in year 15 until year 30? A lot. My point is that this article is centered on a strategy that not everyone may agree with.

    • Joe Lantrip

      Hi David,

      I agree with your assessment of the Cash Flow after year 15, BUT one thing the article didn’t delve into is what happens if Cousin B uses the remaining $41,250 (50,000 – 8750) to purchase MORE properties!? If Cousin B invests this $41,250 AND the Extra Positive Cash Flow from this and the other properties he buys, then Cousin B is a MUCH Wealthier Man after 15 years!


  24. Pedro Gonzalez

    I agreed with Lindow on his strategy, it what I’m planning on doing when I’m able to use my equity. Of course, the sample scenarios are meant to support the writer points, but it can be changed in many different ways and the results will be different, nevertheless, good article because it creates a good debate and exchange of ideas. Thanks to all the participants.

    • Jeff Little

      He could have, although I don’t know if the interest rate would have been the same. He could also have gotten a second mortgage. The general rule is that when your credit is good it is easy to take the first 80% equity out of your house. When your credit is bad you are stuck with your original loan.

      In any case, avoiding the issues of A is valuable regardless of what route you take and there are a lot of people out there in the position of A with no HELOC.

  25. Justin R.

    The majority of people are in the boat where every dollar in free cash flow is desired, but we should also recognize there’s a population of investors who have found some measure of success already and really, truly – and for very mathematically based reasons – would rather build their balance sheet than generate free cash flow. There are tax implications. There are asset quality and liquidity implications. There are life complexity and legal risk implications.

    No qualms with the argument that financial leverage drives both free cash flow AND one’s balance sheet, but the implicit assumption that an investment has to drive free cash flow is … simplistic.

  26. Tim Swierczek

    @JEFF TREVARTHEN Awesome post. From one lender to another you nailed it and had me laughing at the same time. Great job. I’m stealing your “Nobody cares about equity unless you’re trying to determine your “net worth.” And net worth is as useless as the “g” in lasagna.”

  27. Tony Kar

    I’m no linguistics expert or grammarian, but if you take the “g” out of “lasagna” you have “lasana” which may be a nice place in Chile, SA to visit, but not a delicious pasta dish. The “g” is valuable and necessary and so is equity in your investments. I see both sides of the debate, but putting 20% down is still using plenty of leverage. If you’re young and aggressive and don’t have much to lose you might like to build your portfolio as quickly as possible knowing that if you lose big (though few even consider the possibility) you can start again. If you’re closer to retirement than college age you probably see the value in building at a slower (but safer) pace. Of course “sweat equity” is another option, but if you’re not handy or savvy it may not be an option. Either way, good food for thought and many great comments. I do agree that the difference in interest rates between the 15 and 30 year should be better than 0.25% (at least 0.5%) and PMI for cousin B should be considered. Also would be interesting to consider what it would look like if the year 7 scenario happened in year 1 or 2 and maybe throw in a 5 or 10 percent decrease in property value. There are so many possible scenarios the question might be which strategy capitalizes and hedges best in the greater majority of them. Looking forward to more BP insight.

  28. John Barnette

    So sounds like sage advice would be to set up a heloc on as many properties as I can. I currently own 11 properties with a aggregate LTV of about 55% or so. But did cash out refinance on several last year and now have pretty stiff prepay penalty. In the Bay Area with much appreciated and cash flowing holdings. Thinking easiest to do a heloc on my own residence first. Then suggestions for approaching the other 10 (8-plex, duplex, 7 sfr, 1 condo)? Excellent fico in high 700’a too. Many of my 1st loans are 7 or 10 yrs ARM’s. A bit concerned about putting adjustable 2nd behind an adjustable 1st. Not really thinking any are necessarily 30 yr holds. And really hope the 1031 strategy is a part of IRS rules for years to come. Thanks

  29. Scott Schultz

    in your example one person had to pay in to own the property each month, this is really not a reasonable or fair assumption, no one should ever buy if they have to feed it each month. the argument of paying it off vs borrowing depends on where they are in there investing, if you are in acquisition mode, absolutely use leverage for longer term, but if you are winding down, a fast pay down gets you more cash each month in the end, just depends what your plan is, not everyone needs $100K/month, some of us are very happy with $5-10K/mo if you have minimal or no bills, thats plenty to live a nice fulfilling life of travel and leisure. I say once you have what you need, pay them off and get lines of credit, so when the one you just cant pass on pops up, you can move faster than the next guy.

    • Joe Lantrip


      You are correct in stating you should never buy with negative cash flow, but you may have missed the point that they (Both Cousin A and B) are living in one side of the duplex, so in reality Cousin A has a Very Small monthly housing expense of $287.00. This is actually a Great Way to start investing, as Brandon points out in his Webinars and Podcasts. I kind of wish Jeff would have used the example with Both Sides as rentals. It would have caused less confusion, and been a little clearer for people to see the differences between the 2 cousins’ investment Technics.


  30. Jiri Vetyska

    HOWEVER – when real numbers are plugged in, the reality is completely opposite.
    Same comparison as above, but with real, lowest rates for today:

    250,000 property, 20% down payment, 15 year mortgage.
    Rate: 3.125
    Payment: 1393
    Down: 50,000

    250,000 property, 3% down payment, 30 year mortgage with PMI.
    Rate: 3.875
    Payment: 1140 + mandatory PMI 194 = 1334
    Down: 7500

    So, when it comes to cashflow and savings, both payments are almost equal, the difference is barely $60. And the payment will stay this way for 5 years. Also, because of higher financed amount, your insurance will be higher, eating even more into the $60 savings.

      • Jiri Vetyska

        The cash balance will be the same. No argument there. I am pointing out the deception that the author is intentionally causing with incorrect numbers.
        I love cheap financing and use a lot of it. But but PMI and adjustable rates will really screw you over quickly. What may look like nice barely 4%, is actually 5%. Very dangerous and often deceptive lending practice.
        In the end, it comes down to this – if your cash balance can consistently earn more than the cost of the mortgage (after taxes), then that is a better use of the funds. Buy more properties or invest otherwise. Otherwise, pay your debts (other than mortgage first), especially when you know you can refinance at any point.

        • Joe Lantrip

          Great Input Jiri !!!

          When you consider the dreaded PMI there is VERY LITTLE difference. If in fact it comes down to only the $60 difference you point out I am DEFINITELY going with the 15 year to avoid the TOTAL WASTE OF MONEY of $194/MO PMI payment…


  31. Todd Libby

    You’re a mortgage guy, so I’m curious how you came up with those monthly payments??
    I’m also mortgage guy of 12 years, and own 3 investment properties, and have owned 4 others in the past. With that said, I REALLY hope I’m not missing something obvious. lol.

    A 15 year mortgage on $200k at 3.75%:
    P&I: $1480
    But you had the total payment at $1787. That means that there must be $307/mo for taxes and insurance? Ok, so that same amount will be applied to the FHA…

    A 30 year FHA mortgage at 4% would first have an up-front MI premium of 1.75% of the loan amount ($4222) added to the principal. The actual starting balance would be $245,472.
    P&I: $1172.
    MI: $156
    T&I: $307
    TOTAL PAYMENT: $1635

    That means the actual difference in monthly payments is only $152, not $302.

    The only thing I could think of was maybe that $1787 payment included the extra cash flow being added in that was mentioned, but then your balance after 7 years would have been closer to $104k, so I’m guessing that’s not it.

    Please explain, or update the comparison.

    btw – I’m not saying the 15 year is a better option. I just want to see the correct numbers represented.

  32. Joe Lantrip


    I liked the article overall, but as some have said, I wish you would have taken this article further, and shown the power of leverage by using the money Cousin B did Not put down on his first duplex, but used to purchase many more properties (approximately 4.7 more if they were identical to the example you gave). So, Cousin be would have had 4.7 MORE Properties, All Cash Flowing AND Appreciating, and then he could take the Equity (and saved cash flow) from Those 5.7 (4.7 plus the original duplex) properties and buy even More Properties in a few years !!! Now THAT is the TRUE Power of Real Estate Investing!


  33. Jeff Little

    This doesn’t make any sense to me. In the US we talk about cash flow as being cash left over after paying all bills including the mortgage. It sounds like when you say “Cash less than interest” you might be talking about what we call “negative cash flow”. Multi-unit is different – there you talk about CAP rates, which is indeed before financing costs, but this is not to my knowledge ever used on the consumer side. In any case, the government should never care about what actual cash flow is when you calculate profit and loss.

  34. Casey McLain

    Good article. I would have loved to see the calculations carried forward (assuming no job losses) to 10, 15, and 20 years. Especially when Cousin A’s mortgage is paid off and he could then put that cashflow towards savings. How would it compare? Maybe content for another article?? 🙂 Also, if Cousin A did have that much equity, in theory, a heloc could give him as much access to cash as Cousin B had saved. I could be wrong, but just a thought.

  35. Vaughn Black

    OK, here’s where I,as a new investor, become slightly confused. Any bank I am aware of will only do an investment mortgage (as in one for a rental property) with 20-30% down. I am not aware of any bank in my area of Pennsylvania that will do a Low down payment, Non-owner occupied mortgage. So how can anyone get a 30 year 3 % down mortgage on a rental unit or units? Thank you

  36. Ali Hashemi

    It comes down to how Cousin B uses the money he’s not putting into the house. If he invests it, then he’s the wiser. If he doesn’t then A is wiser.

    Also, comes down to exit strategy. If A’s strategy is to sell at year 5 and upgrade, then he’ll actually have more available cash after selling. If this was his plan all along then he’s the wiser. But again it comes back to what he will then do next.

    Good thought provoking article though!

  37. Hey Jeff, I didn’t read all the comments and it’s hard to search on a phone so sorry if this has been mentioned.

    How do you factor PMI into this calculation?

    Also, your points are totally valid looking short term but I wonder what your take is on paying so much in interest long term? As in, what about a balance of 1 extra mortgage payment a year while saving everything else in a high yield savings?

  38. Kyle Guida

    My preferred approach since I don’t live on my re money . I’m somewhere between those 2. I like to put down a good amount 25-35 percent . Build an emergency fund of 1 year expenses per property then dump the rest to mortgage or re invest that . If my EF drops past a year then I’ll build it make up . I’m more conservative than others because I would rather have a few properties that cash flow 500 and up rather than a bunch of 200 a month ones . Just my opinion

  39. Andrew Syrios

    In the long run, equity is what will make you rich in real estate. But, you need cash flow in the short run and also, you need cash when things go sideways (which they always do sooner or later). So I prefer focusing in markets with high cash flow.

  40. Jason Taliaferro

    I thought a lot like cousin A when starting out. However, after running the numbers it just didn’t make as much sense. Sure if cousin A did what was simple but the key thing is he didn’t diversity. All of his money was locked into that one property. A tenant moving out isn’t the end of the world, and if he was motivated and savvy he could get it leased. There is so much more that can go wrong. As others have put it cash is king. Cash is the most liquid asset which allows you to respond to threats and opportunities the quickest. Also equity is iffy. Having 180k in the bank is vastly different from having 180 in equity. You have to sell to get the equity or do a cash out refi. both cost money and take time. If you sell your house to get equity there is no guarantee that you will get all of it. You may get more or less. Also cousin B could have taken the cash flow and reinvested his money into another property increasing his cashflow, wash, rinse, repeat until losing your job and 1 tenant is not as impactful.

  41. jake snake

    The main point: equity is dead money.

    Similarly. instead, the cash-flow cousin should invest in munis or treasuries at 2-5% rate.

    My critique: I’d love to see this same analysis with

    15 vs 30 year usually is around 0.5% difference, not 0.25% (in your example, 3.75 vs 4.25)
    Also, I’d like to see how much PMI is, probably around 200/month.

  42. Dennis O.

    Great article. All in all its better than a 7 year high interest CD account. The only difference would have been to create a cushion of an emergency fund at 200/month for the 7yrs (16,800) or create a vacancy loss of 5% (6,300).

    Also, I get the buy and hold thing, but not forever… at some point, any one of them could have bought other properties that cash flow to mitigate the risks…in other words scale.

  43. Vaughn K.

    As already mentioned this simplified example doesn’t do the 30 year mortgage justice. They’re overall different strategies, and to play the 30 year strategy to the fullest you need to reinvest all that extra cashinto something useful… Like more real estate, not let it sit there doing nothing. Otherwise there’s not much point to it.

    What cousin B should do using that strategy is buy duplex 1. After a year move into duplex 2. Then do the same with duplex, 3, 4, and 5. After 5 years he can move into his nice single family home and sit on his duff for the rest of his life knowing that he is cash flowing on all 5 duplexes, is diversified so it doesn’t matter if he has some vacancies now and again, and just let his net worth steadily go up. After 36 years he’ll have 5 paid off duplexes and his single family home. His cousin will presumably just have the one duplex, or maybe he repeats the same at year 16 and he has 2. Big deal. Vastly different outcomes from the same initial investment, with cousin B being a clear winner financially.

    If they’re all worth 500K after 36 years (lowish appreciation estimate) cousin B is worth 3 million (including his SFH), cousin A is worth 1 million.

    That’s the power of using the banks money at low interest rates. AND the whole while cousin B would have had better cash flow, more security due to diversification, AND ultimately more equity to lean on after the first few years if he needed it because tenants were paying off 5 mortgages for him.

    The only potential risk for him might be in the first couple years, but even then he has cash in the bank to ride out rough patches up until he’s buying duplex 5 when he finally exhausts it, so he’s more solid than cousin A even then.

    You can’t pick and choose pieces of a strategy and then compare. You have to look at the WHOLE strategy taken together. Cousin B leveraging his money more, and perhaps even reinvesting his cash flow buying more than 5 duplexes or stepping up to apartment buildings, has the potential to make several million dollars from the same initial investment as cousin A, cousin A literally cannot possibly make that much because he didn’t leverage enough.

    That’s the power of leverage. If you want a safe, mediocre investment, you can go the route of cousin A… But it will not make you nearly as wealthy as using more leverage. The caveat being you don’t want to get TOO deep in hock, and one should really only take on a lot of debt in a market that seems to be long term stable, and positively cash flows. You can’t keep adding properties one after another if you’re running negative cash flow obviously. But if you’re in a market that is even going to maintain pricing with zero appreciation, and cash flows, the more debt the better in the long haul.

  44. Costin I.

    Interesting article, but I think in real life, the same reasons that made Cousin B go for the “easy money”, low DP, long term financing, will make him spend his savings and in the end he will have less equity and no saving.
    Or worse, Cousin B will use the “savings” to get another duplex in the same conditions, and lose them both in a recession, because he isn’t the disciplined type to have reserves and savings to weather downsides.

  45. Amber Porter

    You really need to do an apples to apples comparison. You would need to run a net present value comparison or future value comparison. Assume that each cousin invests their entire $50,000. Assume any cash flow is reinvested. Assume the negative cash flow is paid for from the current savings that were invested and get sold to make the payments.

  46. Luke Terry

    Great post that leads to alot of great conversation, although I disagree with your assessment that cash is useless compared to equity. I think the better solution for both of them would be to use lines of credit. The more equity someone has in their property, the higher a HELOC they would have, which would keep them afloat during a rainy day, just as cash. They could also use their HELOC to do lump sum payments and accelerate paying off their mortgage even quicker than if they were just contributing surplus cash to their mortgage.

    There’s lots of great options when investing in real estate to handle rainy days and to put your money to work for you instead of just having it sit in a savings account.

  47. chad matthews

    I like fables, stories, and parables because they help bring the theoretical to life.

    As always, there is more than one way to play the game. In the end, it is simply important to get in the game for either cousin; although I can’t help but think that cousin “B” could have improved his position even more by deploying some of his “leftover” savings from the first deal to purchase a second property. While cousin “A” is safely making returns on his investment, cousin “B” could be making even more with a second or even third property. I’m a cousin “B” but I can also easily understand those who are cousin “A” – either way, get in the game.

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