Cash Flow VS Loan Paydown

[Derek Fortin]

As a strategy, is it ever ok to use loan paydown to underwrite a deal? For example: Opting for a 15 year term on a loan for a lower rate and quicker debt paydown instead of cash flowing the difference. Using round numbers if borrowing $500K over 30 years at 6.25%, the debt payment would be $3078.59 with a total paid interest over 30 years of $608,290.96. (i am using these numbers from an online amortization calculator) In the first month paying just $474.42 to the principal ending the first year at $5858.98 of total principal paydown. Versus $500K over 15 years, at 6.25% (we all know a shorter term will have a lower rate, so using this for a conservative example). The debt payment would be $4287.11 with a total paid interest over 15 years of $221,680.58. if you plan on going the distance with the loan, that is a massive difference of $386,610.38. Theoretically your cash flow could be $1202.52 less monthly or $14,430.24 less for the year. However, your principal loan paydown goes up to $1682.95 the first month ending the first year at a total of $20,784.05 loan paydown. This has a difference of $1,208.53 debt paydown the first month and a yearly difference of $14,925.07. In the first year you would have a positive difference of $494.83 between your less cash flow and more principal paydown. With rent increase of 3% per year, and every month your principal payment going up, the numbers should move in the right direction to make this number better with time. What metric can be used to analyze this? The COC Return would be very low but the loan paydown is significantly effecting your equity. I've listened to hundreds of hours of BP & BP Money podcasts and tried searching through forums. I haven't found any discussion relating to this strategy. Regarding the scenario, if I am comfortable with 6 months emergency reserves, does the strategy make sense????? I know there are so many other possibilities in unique scenarios. I am just strictly looking at it in the perspective of Cash Flow VS Loan Paydown. Also in this case, since not cash flowing or profiting much, are there any tax advantages?

[Michael Eskenasy]

This question comes up a lot in different forms, but the underlying issue is how you’re choosing to store value in the deal.

There are essentially three places the return can show up in a rental:

1. Cash flow
2. Principal paydown
3. Appreciation

When you choose a 15-year loan instead of a 30-year loan, you’re intentionally shifting return from cash flow into equity.

Mathematically, the metric that captures that tradeoff is Total Return on Equity, not just CoC.

A simple way to think about it:

Total annual return ≈

cash flow

• principal paydown
• appreciation
• tax benefits

Most investors focus heavily on cash flow because it’s liquid and safer, but principal paydown is still real return — it’s just locked inside the asset.

Where your scenario becomes interesting is that the extra principal paydown in year one roughly offsets the lost cash flow. In other words, the total return may be similar, but the risk profile changes.

That’s the real decision point.

A shorter amortization:

• lowers lifetime interest

• builds equity faster

• reduces leverage risk over time

But it also:

• reduces liquidity

• reduces margin for vacancies/repairs

• increases required rent stability

That’s why most investors still prefer the 30-year structure — not because it produces the highest return, but because it preserves optional cash flow.

You can always take a 30-year loan and prepay principal if things are going well. You can’t do the reverse if you’re locked into a 15-year payment and rents soften.

Where the 15-year strategy can make sense is when the investor’s goal is rapid de-leveraging rather than income — for example someone trying to own properties free and clear quickly.

On taxes: principal paydown itself isn’t deductible. The tax advantages still come primarily from interest expense and depreciation, which are actually larger with the longer loan early on.

So the real tradeoff here isn’t return vs return — it’s liquidity vs equity accumulation.

Curious how others here weigh that tradeoff when underwriting deals.