Would You Rather Have More Cash in the Deal or More Cash in Reserve?

Question

Imagine two identical flip opportunities.

Deal A: You put more of your own cash into the project.

Deal B: You use more financing and retain a larger cash reserve.

Assuming the projected returns are similar, which structure would you prefer?

I'm curious how experienced flippers think about liquidity during a renovation.

Yi Xu · Answer

For me the question is not A or B, it is how big the reserve has to be, and that number comes out of the stress test, not out of preference.

Here is how I size it. I run every flip on a 3x3 grid before I decide on the structure: three sale prices (target, minus 5%, minus 10%) against three rehab budgets (bid, plus 10%, plus 20%), and I add two months of holding costs to every box because the calendar always slips. The reserve I need is simply the cash gap between the box I am planning on and the worst box I still consider plausible. If that gap is $30k, then Deal A only works if I still have $30k sitting outside the project after I fund it. If it does not, Deal A is not "more conservative," it is a deal with no exit if a permit takes eight weeks instead of three.

Deal B has its own catch that the "more financing" label hides. Every extra dollar borrowed also raises the monthly holding cost, so the two extra months I add to the grid cost more in B than in A. I have seen the base box slide from a modest profit to break-even purely from that. So B is only the better structure if the deal still survives most of the nine boxes with B's higher carry inside them.

And to be honest, on one house I underwrote recently, eight of the nine boxes were red at the asking price. No reserve fixes that. The liquidity question only matters after the deal has passed the grid; a lot of "which structure" debates are really "should I buy this at all" debates in disguise.

Linda, when you say the projected returns are similar, are those returns computed at the planned timeline, or after adding the extra months of carry to Deal B's larger loan? That is usually where the two stop looking identical.

Kasing Ng · Answer

Both options carry distinct risks.

Deal A strips your liquidity, leaving no buffer when a timeline slips. But Deal B’s "more financing" is a trap. We watched over-leveraged deals fail across 2022–2024 Sunbelt CRE when rates spiked.

From an underwriting perspective, you want neither extreme. The goal is conservative leverage paired with a cash reserve. If higher financing means maxing out debt service just to keep cash, both structures fail.