I Have $40,000 and I Don’t Know Where to Start…


Such was the title of a recent thread on the BiggerPockets.com Forums.  I can’t help myself – let’s consider options.

But before I dig into the content, I’d like to preface this article by saying that any suggestion contained herein is more like me saying here’s what I would do with $40,000, which may or may not be the right answer for the individual who posed the question on the forum or any of your reading this.

Furthermore, while I will be using plausible examples to outline thinking which in my opinion holds merit, it must be noted that for those of you who feel the need to ask this question on a public forum, the only right answer for you is EDUCATION!  For now, you need to invest into your education, not property – you are not ready for property if you need to ask this question…

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Power of Leverage

Many of you know that I specialize in creative finance methods with the aim of achieving 100% leverage whenever possible.  I’ve written about it in other articles but this boils down to my belief that leverage is one of the greatest keys to unlocking the power of the real estate investment vehicle.  Properly applied, leverage has the potential to amplify our investment returns and can create opportunities which may otherwise be out of reach.  With this in mind, let us pencil several scenarios for deployment of $40,000 of available capital.

Single Family Dwelling for All Cash

In many parts of the county including Ohio, which is where I live and work, $40,000 easily buys a single family property which would rent for $550 per month.  After deducting about $120/month for property taxes and $70/month for fire insurance, and deducting 20% ($110/month) for vacancy and repairs, a property like this will generate monthly net operating income (NOI) of roughly $250.  And since there wouldn’t be a mortgage in this case, the NOI would flow through directly to Cash Flow.  So, what would be the ROI on this investment in terms of Cash on Cash?

Cash on Cash  = Annual Cash Flow / Invested Capital

Cash on Cash = $3,00 / $40,000 = 7.5%

This is pretty good – it certainly beats the snot out of stocks, bonds, and all the rest of the conventional investment vehicles.  But, let’s take this one step further…

Pull out Cash

Let’s say that having collected two or three months of rent you go to a bank and apply for a mortgage.  All things being equal, the bank agrees to leverage your house 70% LTV, and if the house appraises for the 40k that you’ve got in it (if you do things the right way it should appraise for much more), then you’ll be able to put a mortgage on this rental house in the amount of $28,000.

Naturally, this loan would necessitate a monthly payment, which at today’s rates of around 4% would be right around $135/month for a 30-year amortized note.  After this mortgage payment, your cash flow would come down from $250/month to $115/month.  But, you’ve just re-capitalized yourself to the tune of $28,000, which is tax-free for life since it is borrowed money 🙂

Question – Was it worth it to give up $135/month of cash flow in exchange for $28,000 of tax-free money in the bank?  You are a pretty smart cookie…

And what does this do to your ROI in terms of Cash on Cash?  Remember, even though your cash flow is down by $135/month, your invested capital left in the deal is now only $12,000 since you pulled the rest out:

Cash on Cash = ($115/month x 12) / $12,000 = 11.5%


For many reasons, some of which I described in other articles, I prefer investments in multi-unit space.  Let us consider the impact of using the available capital to acquire a small multiplex.

In my neck of the woods, it is possible to buy a 4-plex for around $120,000.  Let’s say that instead of utilizing the equity to buy a house outright, you use the money to make a down-payment on a $120,000 4-plex.  You would not need the entire 40k since the 25% down-payment requirement would necessitate that you put down $30,000 in this case.

Each apartment in a building like this should rent for at least $500 per month, giving you gross revenue of $2,000.  After deducting property taxes of about $300/month and fire insurance of $100/month, as well as holding back 20% for vacancy and management expenses, you would be left with a monthly NOI of $1,250.

Financing $90,000 at 4% over 30 years will cost you about $430/month.  This would leave you with cash flow of $820/month, which constitutes a 33% Cash on Cash return!

Cash on Cash = ($820/month x 12) / $30,000 = 33%

I don’t know about you, but I’ll take $820/month of diversified Cash Flow any day of the week, even if I have to trade it for 30k.  But those of you who know me well, know that I would get there without having to put $30,000 down…


There are many ways to play the game of real estate investing, and there are many opportunities to invest 40k.  At then end of the day, though, until you KNOW what to do with the money to the point that you do not need to ask for advice, the best investment is in your education.  I hope that this article serves as a step in this process…

Photo: Christopher Schoenbohm

About Author

Ben Leybovich

Ben Leybovich has been investing in multifamily residential real estate since 2006. His area of expertise is creative finance. Ben works extensively with private as well as institutional financing. Ben is a licensed Realtor with YOCUM Realty in Lima, Ohio. He is also the author of Cash Flow Freedom University and creator of a cash flow analysis software CFFU Cash Flow Analyzer.


  1. Love your statement: “For now, you need to invest into your education, not property – you are not ready for property if you need to ask this question…”

    AGREED !!!

    As you said, there are so many answers to that question. Like you, we hold onto our cash. I would tell them not to use their money for purchases, but (1) for education, (2) spread it out over time for marketing, and learn to buy creatively.

    Thanks for a great, detailed post. Fabulous.

  2. Ben, I see why you like multi family now. In my neck of the woods a four plex getting $500 per unit would be a great deal at $150k. Market value is closer to 200k -220k. While I can pick up sfr(or could until market spiked) for 100k fix up a little and rent for $1200

  3. Hi Ben, nice post. In my case I did a HELOC for $50,000, went out and bought an REO for $50,000. After rehabbing, refinance got all my money back, rented it out, getting $250 a month positive cash flow. Did that 4 times the first year and still had the $50,000 HELOC. Wish I’d known how to do this earlier.
    P.S. I do all the rehabbing myself, keeps the cost down and gives me something to do.

  4. Great article Ben!

    I have a question about the $28k being financed. I have not found a bank that would finance a home that low of a principal. Is there a particular one that you can recommend?


    • Tony,

      You are correct, which is one of the reasons I stay away from SFR. If you buy them cheap enough so that they cash flow, then they are too cheep for most banks. I used small numbers in this article because most people can wrap their heads around 50k with more ease than 500k.

      I have a thought for you, and everyone reading:

      If the bank doesn’t think that this dinky house is good enough collateral for them, why do you think it is something that you want to own. Think like the banks!!!

      Thank you so much for reading Tony!

  5. John Thedford on

    Thanks Ben. Great article. Education is the key. This is why I spend time on BP as well as local REIA meetings and read as much as possible. All cash vs pulling cash out vs leverage to a higher degree are three choices every investor faces. At some point many investors use all three techniques as their situation changes over time. This blog helps answer the age old question what to do with cash! Thanks!

      • John Thedford on

        Thank you Ben. I recently did a cash out of a free and clear property and used the money to buy two more. The free and clear has only been a cash drain but I finally did the right thing and put it to good use. The two new properties are cash flowing and now I am enjoying the rising prices in the local market, tax advantages of rentals, cash flows, and getting something out of my free and clear property besides a HUGE tax bill. There is still enough equity in the free and clear to purchase another unit when I find the right deal. Debt used to scare me but I finally learned there is nothing to fear as long as you have reserves and a Plan B if things go slightly awry.

  6. Interesting article Ben. You could also lend out your $40K as a private money lender. You could lend it to an investor on BP, who needs money for a $60,000 (ARV) property. You can get 15% on your $40K with 3-6 points for a 1 year interest-only note (with a prepayment penalty of 2 points if the investor pays you back in less than 6 months).

    Sure, you won’t get appreciation with a property but you also won’t get all the work that comes along with it.

    Just another idea for this person to consider.

    Good article,

    • Dave,

      Absolutely, and one of these days may get a call from me. However, for now I want the possibility of appreciation as well as the preferred tax treatment. Furthermore, if you know me, there would not be any down-payment in the deal…:)

      But you are right – there is a time and a place for doing what you are suggesting!

      Thanks for your comment Dave!

  7. Ben-
    You said for the multi-family properties you’d do it all without any of your own money (i.e. get the down payment from somewhere else). That sounds great, but just wondering how you would source this (especially as someone with little experience). Would you go for a private money lender at a steep interest rate? And how would you find them/structure the deal? Seeking advice as I am considering doing this as well.

    • Justin,

      Your question is right on. First, I would do SFR with o down as well, it’s just that I wouldn’t bother with it now days. But I did when I first started. I am thinking of writing an article titled something like “7 ways to buy a house with no money down” or something – thoughts?

      I have been doing this for 8 years and I’ve yet to use hard money. Not that it can’t be done or is not appropriate in certain circumstances, but I found other ways.

      I can’t tell you how I’d do it because that depends a lot on the deal. Some times it involves owner-financing with a refi; sometimes short turm OPM; some times long-term OPM; sometimes a blend of private and institutional – I wrote about 200 pages on the subject, so I won’t attempt it here in any more detail than this, but if you are serious about learning this stuff you should really check out CFFU – you’ll find a lot of answers there http://justaskbenwhy.com/?page_id=3420

      Let me know your thoughts. Thanks for your comment and good luck!

  8. Tony Bingman on

    I,ve been in this business for twelve years and i have learned i need some education. In your book do you explain how investors can protect there properties from meth labs? There’s no insurance company that will pay for the cleanup which is VERY costly. Thanks for your comment.

    • Tony – we learn every day. Meth labs are a real problem and there is no easy fix. As the matter of fact, meth labs and bugs such as bed-bugs are some of the biggest deterrent from multi-family. The problem spreads from unit to unit and is, like you said, very costly to remedy.

      What can I say – not much. We try to pick buildings that we think these problems will bypass, but we really can’t stop these kinds of things. Whatever will be – will be. The only question is – do we stay away from investing in multi-family, or even any real property at all due to this…I do not have a better answer Tony, sorry.

      Thank you for your comment!

    • Spatel,

      I noticed this error too. That would bring yield down a bit.

      I too have used my HELOC several times. Man, that HELOC has made me so much money and been very profitable for us! I’m now buying 1st position mortgages and foreclosing on them and wholesaling them to investors in the area I buy them in.

    • LOL Yes it should – this is what happens when one writes articles at 1 am when the kids are asleep, and so are the contractors 🙂

      On the bright side, the CAC return number is even more skinny in the SFR case than I outlined due to the mistake. So, in a weird way the mistake actually builds my case even more… hahaha

      Thank you for catching it Spatel!

  9. Paul Grgurich on

    Ben – thank you for sharing your vast knowledge, I am learning everyday and with articles like this it just fuels my desire to drive on harder! I am headed to your website right now…

    • Chris,

      This is a very direct question that you ask. I wonder why…regardless, a direct question deserves a direct answer:

      On February 4th of this year I closed on a 10-plex. I needed to bring $5,300 to closing. The cash flow on day one stood at $1,000/mo. 3 months later, the cash flow now is now $1,300. By the end of 2014 the cash flow from that building will be $1,700 – $1,900/mo.

      Yes – this deal required some capital; many others do not. I describe this deal and the technique I used in Podcast 14

      and this article

      This is one example. Every deal is different and my approach on every deal is different as well. I provide a multitude of examples and describe my thought process and techniques here: http://justaskbenwhy.com/cash-flow-freedom-builders/

      Thanks for reading and commenting Chris

      • Thanks for the reply. I didn’t ask the question to cause conflict, only for additional information. I figured since you stated you know of other ways to secure $820 without putting down $30k, why not ask.

        The article you provided was indeed helpful. I’m currently looking at purchasing 9 condo units for $244k. The area is decent, however I’ve yet to visit the inside of the units. Some of the units from the pictures I saw need updating. I was thinking of forking over the down payment in cash, however, after reading your article I’ll try to be as innovative as I can to secure down payment funds elsewhere rather than my personal account.

  10. Hi Ben,
    I’m looking at a 4 unit asking price 129,900. Tenants pays own heat,etc. I have viewed it online and from the car. Waiting to hear from agent to view it up close. I have 20k from a HELOC. This is in upstate NY. What should I be looking for in cash flow and an offer? It will need siding, has a new roof, best I can tell units look in good overall condition, and it’s 1 mile from a college and is on a nice street mixture of SF’s and multi’s.



    • Henry,

      Thanks for your comment but I have no idea how to answer your question. The formula for figuring out value is:

      1. What is the gross income?
      2. What are the operating costs?
      3. Figure out the NOI
      4. What is the going CAP Rate?
      5. NOI / CAP Rate = Value

      If I may suggest to you that the phrasing of your question reveals a certain lack of experience. Perhaps a bit more education would not be a bad idea…check out my website – lots of useful stuff there.

      Thanks for your comment and good luck Henry!

  11. Ben,
    Great article. I am a first time investor with the same amount. I am currently in a dilemma. Would you suggest buying a SFH in West Toledo area which is built in 1930’s (but updated with furnace, electical, remodelling done etc) ?. The cash flow is $350 after taking out taxes,insurance, maintenance etc. As the property is old – is there a chance of appreciation in future – say 5 years from now?. Is it wise to invest in such an old property?.


    • Hello Patrick,

      It is difficult for me to answer your questions without knowing your objectives. If you are interested in cash flow, then as this article suggests you are likely better off to invest in a multi-family. If you are hoping for appreciation, you should probably invest in a house where none of the upgrades have been done, and then do the upgrades to force appreciation.

      Generally speaking, I don’t know if it’s wise to plan on appreciation in Toledo – that’s just an opinion…

      If I may suggest that you do a bit more research into the marketplace before deploying capital 🙂

      Thanks for taking the time and good luck Patrick!

      • Thanks Ben for the prompt response. Can someone have both the objectives together – Having Cashflow as well as appreciation in long term?.
        Also the property which I am interested has an equity of around $10K build into it based on my purchase price and the appraised value. However my only concern is (which I would like you to share your thoughts) about the age of the property – as it was build in 1930’s.

        • Patrick,

          The age of the property presents unique challenges – obviously. Relative to value, however, the age can be a good thing or a bad thing; depends on your market.

          When we invest we should always attempt to go for CF and Equity. However, you are in Toledo man. It’s not necessarily a happening place where you can expect too much appreciation. If you buy the right thing you can look forward to keeping up with inflation, but I don’t know about more that than, and I don’t know if this house qualifies as the “right thing”…

          Good luck Patrick 🙂

  12. Tim Chasteen

    Hey Ben,

    Can you recommend any markets for buying small multi-units in the SW quarter of Ohio. I know you are in Lima, but figure you probably know a little bit about other markets like Dayton and Cincinnati as well.

    I feel like such a beginner asking this question but I admittedly have little experience and it is taking me a long time to find my target market. My buying criteria are buildings newer than 1950’s, $200 cash flow per door or $100 with 100% financing, 15% cash-on-cash return, area with a good school district (at least rated B on the performance scale) and crime rates that are at or below average.

    I found a market that looks good for SFH’s but the more of your articles I read the more attractive a 4-unit with a 3.5% FHA loan is looking.

    Thanks Ben!

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