Cash on Cash or Cash Flow?

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Cash on Cash or Cash Flow?

Shane H.
Member since 2018 · 433 posts · 208 votes

I understand the math behind it, so I'm seeking opinions more than anything.

I the general consensus in real estate investing is to leverage yourself into greater wealth. While I understand that, I would say it's definitely the long game... having 5 properties valued at 100k each instead of 1 at 100k with the same money in. You won't however, have the same time in. You'll be spending much more time keeping after 5 properties. And your monthly cash flow doesn't seem to be all that much better until you start paying then off.

So using generalities let's say I can leverage myself to get 12 units at 100/door. Or I can buy a small multi outright for the same cash in, but net the same 1200.

Who believes the risk of leveraging and the interest paid on the loan is worthwhile for the end result of a ton of equity in 25 to 30 years. Who thinks buying outright and gaining the immediate Cash flow is the way to go?

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Jason D.
Rental Property Investor · St. Petersburg, FL · Member since 2017 · 3k+ posts · 4k+ votes
7y

@Shane H. When buying a lesser valued property with cash, you lose 2 major things...

1) Depreciation. Because that value is less, you dont get the same tax savings

2) Interest income writeoff. With no mortgage, you lose the tax benefit of writing off mortgage interest.

So even though the two properties "cashflow" the same, you keep significantly more money if you leverage multiple properties with the same cash.

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  • Heather O.
    Specialist · White Rock, British Columbia · Member since 2017 · 99 posts · 34 votes
    7y

    I would go with cash flow at first only if one must due to temporary circumstances.  

    Cash on Cash is clearly the best long term move.  This is the only thing that I have relied on.  More satisfying and forgiving.  

    Now cash flow is hardly even a consideration. 

    1Reply
  • Heather O.
    Specialist · White Rock, British Columbia · Member since 2017 · 99 posts · 34 votes
    7y

    Super question, BTW!

    1Reply
  • Morgan Klein
    Rental Property Investor · Jefferson, GA · Member since 2017 · 95 posts · 145 votes
    7y

    Ideally you want properties that can give you both.  

    0Reply
  • Don KonipolBusiness Member
    Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
    7y

    @Shane H.

    Investing in NYC in 2002 leverage would have been a great idea. Investing in Detroit in 2002 - not so much.

    Variables - Age of investor, quality of property, stability of cash flow, makeup of rest of portfolio, amount of cash reserves, attitude toward risk, goals and ambitions, etc. no set answer.

    35 years ago I was all about leverage. Now, only use it when rates so low I can’t resist

    Private Mortgage Financing Partners, LLC
    WebsiteView Page
    1Reply
  • Jason D.
    Rental Property Investor · St. Petersburg, FL · Member since 2017 · 3k+ posts · 4k+ votes
    7y

    @Shane H. When buying a lesser valued property with cash, you lose 2 major things...

    1) Depreciation. Because that value is less, you dont get the same tax savings

    2) Interest income writeoff. With no mortgage, you lose the tax benefit of writing off mortgage interest.

    So even though the two properties "cashflow" the same, you keep significantly more money if you leverage multiple properties with the same cash.

    2Reply
  • Account Closed
    Specialist · Paradise Valley, AZ · Member since 2018 · 3k+ posts · 2k+ votes
    7y
    Originally posted by @Jason D.:

    @Shane H. When buying a lesser valued property with cash, you lose 2 major things...

    1) Depreciation. Because that value is less, you dont get the same tax savings

    2) Interest income writeoff. With no mortgage, you lose the tax benefit of writing off mortgage interest.

    So even though the two properties "cashflow" the same, you keep significantly more money if you leverage multiple properties with the same cash.

     Taxes should be 1/3 of your investment strategy.

    1Reply
  • Shane H.
    OP
    Member since 2018 · 433 posts · 208 votes
    7y

    @Heather Olson

    Thanks!

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  • Shane H.
    OP
    Member since 2018 · 433 posts · 208 votes
    7y

    So as a business owner Cash flow is king. Maybe that's something I need to get over.

    I think the answer has something to do with whether real estate is going to be your business or your passive investment.

    I.e. if I sold my business to get into real estate I would need the cash flow. In my market I could spend 200k outright and have cash flow of close to 2k/month. That is a liveable income here albeit not a prosperous one.

    Alternatively if I'm keeping my business or job and investing on the side I would want the most cash on cash otherwise i could just dump it in stocks for that purpose...

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  • Shane H.
    OP
    Member since 2018 · 433 posts · 208 votes
    7y

    The tax strategy is a good point. 18k deduction vs. 3500... that could equate to an extra 200 plus cash flow... I see leveraged investments as far riskier though. Is 3k/yr in tax incentive worth that risk?

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  • Account Closed
    Specialist · Paradise Valley, AZ · Member since 2018 · 3k+ posts · 2k+ votes
    7y
    Originally posted by @Shane H.:

    The tax strategy is a good point. 18k deduction vs. 3500... that could equate to an extra 200 plus cash flow... I see leveraged investments as far riskier though. Is 3k/yr in tax incentive worth that risk?

     You are over thinking this. Are you sure you want to be a real estate investor? Perhaps mutual funds or treasuries which are far "safer" is what you should be considering. Friendly advice. Real estate is risky. Period. ;-)

    1Reply
  • Jason D.
    Rental Property Investor · St. Petersburg, FL · Member since 2017 · 3k+ posts · 4k+ votes
    7y

    @Shane H. I dont find it to be risky. I have an asset that is worth more than I owe on it, and would very likely still be worth more than I owe even in a downturn.

    I like to be 70% leveraged at my maximum point, so unless theres a serious crash (which is very unlikely in my market, based on every metric imaginable), I'll be able to mitigate my risk

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  • Shane H.
    OP
    Member since 2018 · 433 posts · 208 votes
    7y

    @Mike M.

    I'm only comparing the 2. I W ouldnt own a business if I were scared of risk. I disagree that mutual funds are less risky though... if my goal is to retire young the chances of doing that with mutual funds are 0. That would then be the riskiest option... to jump in without analyzing the risk would be foolish. My goal is to analyze the risk and make a decision of what is worth the risk and what isn't. Having 5 headaches to manage vs 1. The return on investment. The cash flow. The tax advantages. All need to be assessed. If the only difference is 200 bucks a month and the far greater risk, the answer is simple... Buy outright. But the equity that builds with time is a heavy weighted factor that I have yet to decide on...

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  • Shane H.
    OP
    Member since 2018 · 433 posts · 208 votes
    7y

    @Jason D.

    But do you really own an asset worth more than you owe? I'm sure that you do when you compare current value of the loan. What about when you look at what the loan will actually cost you?

    100k down on 500k worth of real estate at 5 percent will ultimately cost 875k on a 30 year loan. So even assuming a 50 percent increase in property value, you will have overpaid. (I understand the tenant is paying that.) But when analyzing risk/reward and cash on cash vs cash flow I'm not sure if that's the right route. (It may be, I'm just weighing both sides and I appreciate all the feedback. Don't mind my playing devils advocate.)

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  • Shane H.
    OP
    Member since 2018 · 433 posts · 208 votes
    7y

    I am leaning toward high down payment early payoff to find a middle ground approach.

    50 percent down payment on 2 100k properties could be paid off in 5 to 10 years with only paying 13 to 27k in interest. At the end of which I would have income enough to live on. From there I could reevaluate which approach to take for future wealth building, while already being financially independent.

    I question the leveraged approach because I hear people shooting for 100/door with leverage. And needing 50 doors to reach 5k in cash flow. I can do 500/door if I pay cash. I may not be building as much long term wealth but for 1/5th of the work, I'm achieving the same cash flow...

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  • Pearly Tan
    Rental Property Investor · NJ · Member since 2018 · 70 posts · 26 votes
    7y

    It depends. I think each individual's situation will dictate what their priorities will be. If someone already has a full time job, then leveraging more to build longer term wealth may be more of a priority than generating immediate high cash flow compared to someone who will be needing that cash flow now as they are doing RE full time. So, the individual's situation will play a big part in this decision.

    1Reply
  • Shane H.
    OP
    Member since 2018 · 433 posts · 208 votes
    7y

    I will say I understand that it would be near impossible to make tens of millions of dollars from real estate without leverage. This is more for a small scale investor. If your goal is simply say... 5k/month to retire on... leverage doesn't seem to speed up the cash flow unless you have a pretty low rate.

    On that note. What kind of interest rates do you look for? Maybe that's why I struggle with the two scenarios. At the higher interest rate the cash flow drops... a lot...

    0Reply
  • Account Closed
    Specialist · Paradise Valley, AZ · Member since 2018 · 3k+ posts · 2k+ votes
    7y
    Originally posted by @Jason D.:

    @Shane H. I dont find it to be risky. I have an asset that is worth more than I owe on it, and would very likely still be worth more than I owe even in a downturn.

    I like to be 70% leveraged at my maximum point, so unless theres a serious crash (which is very unlikely in my market, based on every metric imaginable), I'll be able to mitigate my risk

     If you need insurance on the property, you acknowledge there is risk owning a property.

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  • Jason D.
    Rental Property Investor · St. Petersburg, FL · Member since 2017 · 3k+ posts · 4k+ votes
    7y

    @Shane H. The loan doesnt cost me anything, my tenants pay it. That's the beauty of a cash flowing investment, it doesnt cost you a dime... in fact, it pays you!

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  • Shane H.
    OP
    Member since 2018 · 433 posts · 208 votes
    7y

    @Jason D. I hear that a lot... but the bottom line is that's money that could go in your pocket and it goes to the bank... you're paying it no matter how you slice it...

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  • Jason D.
    Rental Property Investor · St. Petersburg, FL · Member since 2017 · 3k+ posts · 4k+ votes
    7y

    @Mike M. Theres risk in leaving the house in the morning, or drinking a hot cup of coffee, but I don't consider them "risky". Insurance makes it even less risky

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  • Shane H.
    OP
    Member since 2018 · 433 posts · 208 votes
    7y

    @Jason D.

    If you didn't have a loan, the loan payment would go in your pocket each month. Let's say the loan is 100k at 8 percent for 20 years. You've given up $836 of cash flow monthly. At the end of 20 years you will have received 200k less money. That may be an acceptable loss for other reasons such as inflation, increased property value, or simply the coat of money you otherwise didn't have, but it's a loss none the less.

    1Reply
  • Jason D.
    Rental Property Investor · St. Petersburg, FL · Member since 2017 · 3k+ posts · 4k+ votes
    7y

    @Shane H. Sure, but I'm making 10%-15% return on my money. Paying cash only yields the going interest rate.

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  • Jason D.
    Rental Property Investor · St. Petersburg, FL · Member since 2017 · 3k+ posts · 4k+ votes
    7y

    @Shane H. In your scenario I thought we were making the same cashflow? The only difference is that I have 5 properties and you have 1? So in 20 years, when my properties are paid off, we've both made the same cashflow but I have 5 paid off properties

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  • Shane H.
    OP
    Member since 2018 · 433 posts · 208 votes
    7y

    @Jason D.

    That was the point if the whole post. Lol cash flow or cash on Cash? Obviously you feel cash on cash is more important. I'm just trying to understand why. Not too many are jumping in on the other side so I can get the cash flow perspective.

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  • Shane H.
    OP
    Member since 2018 · 433 posts · 208 votes
    7y

    @Jason D.

    Yes, that was the scenario I threw out there. But given that my property is paid for and immediately cashflowong and I have to only manage 1 instead of 5, it's consuming much less of my time. So with the goal of retiring early, I can continue to work the job or business I am currently in and buy the next one cash. You bought them all at once, but I'm paying half the price for them... I'm going to run the numbers and see who pays off 5 first. Give me a few minutes.

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