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.

Alan F. · Answer

The returns couldn't be the same because of the cost of money. Under capitalized businesses operating on thin margins are always at risk.

Denise Supplee · Answer

If the returns are similar, I'd probably go with Deal B and keep more cash in reserve. I'd rather not put every dollar I have into one project. Renovations have a way of coming up with surprises, and having cash available if something takes longer or costs more than expected can make a big difference. For me, the extra liquidity is worth it.

Nicholas Floyd · Answer

I would say there is a losing negative to both options, it depends on how much cash you would have left after you use your own money, for option b could go good as long as your not over leveraging the financing. I tell my clients all the time please do not tie all of your own savings into a deal because we know how that can turn out. So to answer your question. I think it's situational but option B sounds a little better

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.

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

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

Imagine two identical flip opportunities.

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Imagine two identical flip opportunities.