Leverage

[Vidal LeClaire]

i know its good to use leverage when buying multifamily, why does the cash flow increase when debts is used. I am trying to wrap my mind around how an extra expense (debt) increases cash flow. Please leave comments below thank you 

[Jeff Kehl]

Your Cash flow will DECREASE with more leverage because as you say now you have a larger mortgage payment to spend the cashflow on. Probably what you're think of is Cash-on cash (COC) return. It increases the more leverage you use because there is less of your own money invested.

Ex. You buy a $100k house for cash and you make a $5000 cash return in a year. That's a 5% COC return.

If instead you put $20,000 down and get an $80k mortgage and spend $3000 on mortgage payments, your cashflow falls to $2000. But your COC return is now $2000/$20000 or 10%.

Also notice you have $80k more to invest in other properties.

The trick is to use the use the leverage to increase your COC returns but not use so much that you have cashflow problems.

Also, there are several articles here on the site that explain this in a lot more detail:

http://www.biggerpockets.com/renewsblog/2015/04/18/leverage-vs-pay-cash-rental-properties-debate/