Leveraging vs. Paying Cash for Rental Properties: A Look at the Infamous Debate


Oh, the famous debate. Should you pay cash for your investment properties, specifically rental properties, or should you leverage them? If you are new and don’t know what leveraging means, it means using a loan or some other form of money (basically anyone’s money other than your own) to buy property. Buying a house using a mortgage is a perfect example of leveraging.

If you haven’t caught wind of this debate yet, just search for about five seconds on the BiggerPockets Forums and you should find enough entries about this to hold you over for hours! If you have seen these posts or been involved in the debate, you already know exactly what I’m talking about.

I want to start this article by making a very firm prefacing statement that I want to make sure everyone reads. And that statement is:

No matter what any analysis or argument suggests the better method to be — buying investment properties using leveraging or with all cash — the only route you should personally go is that which you are most comfortable with.

Here’s the reality of this debate. I think people get so caught up in the arguments flying back and forth that we forget to take a step back and realize that regardless of which method people prefer, we are all still incredibly awesome because unlike a lot of the rest of the world, we are buying investment properties! Buying investment properties is incredibly advantageous, a lot of people don’t have the nerve to do it, and irrespective of anyone’s methods as to how they do it, we are all investors and we have that in common. That should be acknowledged! That, and there is literally no right or wrong option for how you decide to buy your property. If one guy prefers paying all cash and another prefers leveraging, great! How another guy does it has no bearing on your investing, and neither option is bad or wrong.

Related: Cash Flow vs. Equity: Which Pays Off for Investors in the Long Run?

How’s that for an opening? Everyone feeling all warm and full of smiles inside because you just realized we are all in fact part of this amazing community of really cool people? I know I am!

Now that everyone is feeling great, I’m going to detail my personal stance in the debate. I want to do a secondary preface here and say that my point in explaining my view on this is not to convince you it is what you should do. My point is simply to explain what I prefer for my own investing so you have something to get you started in thinking about what you may prefer for your investing.

You can love what I say, hate what I say, agree or disagree with it — all is fine by me. As I said, this is just the side of the debate I am more comfortable with, and it’s worked fantastic for me with my properties so far! That doesn’t mean you will be comfortable with it or that it will work for your properties, so I encourage you to decide for yourself which route you ultimately want to go (or even better, maybe you do both!).

Are you ready? Time for the big reveal! For all of my investment properties, I prefer leveraging. I will now explain why I prefer leveraging, and certainly if you don’t support leveraging and prefer paying all cash, be sure to give us your reasoning in response! The more input we get, the more educational it will be for everyone.

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An Argument for Leveraging Over Paying All Cash

I prefer leveraging for two main reasons, to be explained in more detail:

  1. The returns are higher.
  2. Risk is lower.

I can already hear some of you gawking at #2. Don’t worry, I’ll get to that one. I want to start with the returns though.

Returns on Leveraged Properties vs. Non-Leveraged Properties

My argument that leveraged properties produce higher returns than non-leveraged properties is based on three sources of “returns” that come with rental properties:

  1. Cash flow
  2. Equity
  3. Taxes

In order to explain some of these, and to conclude this argument, let’s use a hypothetical property that is available for purchase for $100,000. Buying it outright will cost you $100,000. If you finance the property at 20% down, it will cost you $20,000. In real life there are fees attached to each method, but for now I’m going to keep it simple and leave those out (but be sure to include those in your real-life calculations). Also hypothetically, you have $100,000 to invest.

Cash Flow

If you aren’t familiar with Cap Rates and Cash-on-Cash Returns, start by reading “A Definitive Guide to Understanding Cap Rates and Cash-on-Cash Returns.” This will explain the terms, what they mean, how they differ, how they are used, and how they are calculated. Ultimately, the Cash-on-Cash Return is going to be the most helpful to you in understanding the (cash flow) return on the money you invest. Cap Rates are helpful for some things, but for what we are talking about here, it’s the Cash-on-Cash Return that matters.

Now, a tidbit:

The Cap Rate and the Cash-on-Cash Return on a property will be the same if you pay all cash.
The Cap Rate and the Cash-on-Cash Return on a property will differ if you leverage.

The reason I bring up both of these terms, despite saying it’s only the Cash-on-Cash Return that matters right now, is because when you start shopping for properties, it is the Cap Rate that is more often advertised. Cash-on-Cash Returns often aren’t advertised because they are dependent on the terms of the loan, which can vary, and Cap Rates are irrelevant of loans.

In order to determine what (cash flow) returns you should expect on a property, you need to be able to calculate that Cash-on-Cash Return. But if you are paying all cash, you can save yourself a step and just assume it to be the same as the Cap Rate. The main driver in this is the number used in the denominator of the equation, which is the amount of money out of your pocket. So this will be $100,000 for the non-leveraged property or $20,000 for the leveraged property.

Do these calculations for yourself on any property you are looking at. For the properties I have always bought, and for the majority of cash-flowing investment properties, the Cash-on-Cash Return of a leveraged property will usually be significantly higher than that of a property purchased with all cash.

This will not be the case with a lot with the Texas markets, for example, which do produce good cash flow but on the lower end due to high Texas property taxes and insurance. But on properties that have good cash flow, the Cash-on-Cash Returns for a leveraged property can easily be double or more than that of a non-leveraged property. But don’t take my word for it, do the math yourself and see what you find.

If you need additional help on figuring out how to calculate Cap Rates and Cash-on-Cash Returns, check out “Rental Property Numbers So Easy You Can Calculate Them on a Napkin.”


In short, there are different sources or arguments around equity, but for simplicity, let’s just look at appreciation. Let’s say our hypothetical house bought for $100,000 in 2015 appreciates by $15,000 by 2016. If you bought for cash, you bought one house (because you only had $100,000 available to invest, remember).

You will then have experienced $15,000 in equity build due to appreciation. But let’s say you leveraged, so you were able to buy five properties instead of one ($20,000 each, which totals $100,000). If those houses experienced the same appreciation wave, by 2016 you have now earned $75,000 ($15,000 x 5 properties) in equity build. That’s a huge difference! In this case, the investor who leveraged now has 5x more in available equity than the cash-buying investor.


For anyone unaware of one of the biggest financial benefits of owning rental properties, I suggest you study up on depreciation. I’m not going to get into the details of it here, but it is a major write-off on your taxes for any rental property. Hypothetically, let’s say the depreciation write-off on this property in one year is $2,500. If you paid all cash and you have that one rental property, you will have $2,500 in total depreciation deductions. If you leveraged and bought those five properties, you will have $12,500 ($2,500 x 5 properties) in total depreciation deductions for the year! Another huge difference!

As you can see, and as you will see if you do some calculations on your own, in most cases the return on the money you invest and the amount of income in addition to just the cash flow will be higher when a property is leveraged. If you disagree with any of my math, certainly chime in and let me know your thoughts. But as far as all of the math I have ever done with rental properties tells me, leveraging a property produces significantly higher returns overall.

Risk Involved With Leveraging Rental Properties

I hate to point you in the direction of another side article, but I actually wrote a detailed analysis on this in a past article. I will summarize what I wrote there here, but if you do want to read all of the details, check out “Is Leveraging Really that Risky?

What that article boils down to is: In my opinion the only thing at more risk by leveraging (at least through a reputable source, like with a mortgage) than by not leveraging is your credit score. If something were to go haywire with a property you have financed and you have to foreclose on it or short sale it or whatever, the only thing lost there will be some of your credit score.

Let’s look at it in this very simple way:

If you buy that $100,000 house outright and something goes horribly wrong, you will be out $100,000. If you finance that $100,000 house, and something goes horribly wrong, you will only be out $20,000. In that case, the bank loses way more than you do. So doesn’t that mean that essentially the bank assumes the majority of the risk on a property when you finance it? It absolutely does!

And the best part? While the bank assumes most of the risk, you still reap 100% of the rewards. The cash flow from the property, any equity built due to appreciation, extra income due to major tax write-offs… all yours! Again, yes, your credit score is at risk should something go wrong, but is your credit score really that life-threatening? Ummm… no. Sure, it’s very helpful and convenient to have a good one, but the world won’t end if something happens to it.

Some people argue that the danger in financing lies in the possibility of you not having the money one or more months to pay the mortgage. This has been a huge issue, people not being able to pay their mortgages, in our country over the past few years and arguably one of the reasons of the demise of the economy we just experienced — but remember, those statistics lie mostly with primary homebuyers who don’t have a lick of investing experienced and since banks were handing out mortgages like candy, of course people got in trouble!

But we are talking about real estate investors now. I would like to think we have a bit more education than all of those folks who bottomed out on their mortgages (we certainly have the resources at our disposal to help us with that education!), and by the time you buy your first rental property, you have enough of a head on your shoulders to:

  • buy smart so the risk in not being able to cover your mortgage is very minimal (which strongly involves location, tenants, property condition and maintenance) and
  • have a nice nest egg to cover any unforeseen emergencies.

If you have both of those things, the chances of you running into a problem so severe that you can’t pay the mortgage is quite small. But even if you do, remember, you will only be out that $20,000 (if even that much because you were collecting income on the property for all the time you had it), and your credit score will have a ding. Quite survivable.

So in summary of risk, the way I see it is: You’re either out $20,000 with a ding on your credit, or you’re out $100,000. I don’t know about you, but option #1 sounds much better to me!

Related: Why You Can Sometimes Pay More With Good Financing: A Message to the Naysayers

Which Side of the Debate Are You On?

Well, now you have heard my personal stance when it comes to whether I leverage my properties or pay cash. I have always leveraged my properties, and I plan to continue doing so for all the reasons I mention.

But like I said, I don’t expect everyone to agree with me or suddenly feel comfortable leveraging. If you do prefer to pay all cash, or think it is the better route to go, please share any information with us you are willing to share in the comments! The more input, the more education everyone will have, and the more comfortable everyone can feel in making their decision.

As a slight rehash, neither way is wrong or right. They just are what they are, and everyone will have their reasons for which one they choose. I don’t personally believe paying all cash is the most lucrative or safe way to invest, but I won’t for a second tell anyone who does pay all cash that they are wrong or that they shouldn’t do it. The reality is, not everyone is comfortable leveraging!

So what is your stance? What are you most comfortable with?

Educate us!

About Author

Ali Boone

Ali Boone(G+) left her corporate job as an Aeronautical Engineer to work full-time in Real Estate Investing. She began as an investor in 2011 and managed to buy 5 properties in her first 18 months using only creative financing methods. Her focus is on rental properties, specifically turnkey rental properties, and has also invested out of the country in Nicaragua.


  1. I agree with most of what you say, other than that leveraging is less risky. You have a $20k equity position in a $100k house, and while you reap all of the rewards, you also bear the first $20k in risk. In most cases, the first 4 loans an investor receives are recourse loans, meaning that the bank can collect against your personal assets in the case of default. Many people may have their assets ring fenced in various legal structures, but others of us have seen loans get called once the deed is transfered to an LLC (due-on-sale clause). This means that, particularly if the loan is in your own name, you have more at stake than implied above. You have your credit rating, your equity position, and your assets at stake. Worse still, when a market recedes, you may be underwater on your loan, which means that you owe the bank more than the house is worth. In a situation like this, if you want to divest a negatively cash flowing asset, you need to come to the closing table with cash. I can’t think of many situations where a house bought for cash would be cashflow negative – this would allow a cash buyer to ride the cycles much better than a levered borrower.

    That being said, I use leverage when I buy my properties. Leverage is a return enhancer, and if you have are smart in the way that you use your working capital and budget for the unexpected, it can be a very powerful tool indeed.

    • Keith Weinhold

      Hi Riley,

      You know someone whom has seen their loan get called once the deed is transferred to an LLC, exercising the due-on-sale clause?

      In my years of investing & all of whom I’ve come in contact with and talked to, this has never happened to anyone.

      Can you name the lending institution?

      Thanks, Keith

    • Ali Boone

      Great info Riley! Thanks for sharing. I’m glad you mentioned the recourse loan… I forgot to include that in there. It’s a major point. I recommend only dealing with non-recourse loans! For the exact reason you say. Yes, leveraging is risky if all of your assets are at risk for it. I was thinking about non-recourse, but I didn’t mention that (eek).

      As far as being underwater, underwater only matters if you have to sell it, otherwise no bearing on anything. The equity position depends on the situation, or the loan, and then any additional money you’d have to bring to the table for whatever may happen is still less than had you bought the property outright. That’s the thing- you risk $20k or $100k to start. If you go the $20k route, and then had to pay out something after that, assuming it’s under the $100k total, you’re still out less than had you paid the full $100k. No?

    • I agree with you absolutely. But, age, health and a volatile market are also big factors. While I was a relatively small real estate investor my property holdings (only 3) were valued at 2.5M+ 15 years ago and my debt was about half (1.25 M). My tenant always paid in full, on time, because it happened to be me. My business operated out of 2 of these buildings. They were projected to net me a post tax gain of over 2M, and I was well into 6 figures in income, saving 5 figures a month and everything was great, in a 50% equity position. In 2004 I got sick – really sick. I continued to work for another year but by 2006 was too ill to work. Then 2008 happened and my business, which had been stable over a decade dropped in sales by 40%. Then the rents that covered the mortgages were not so easy anymore and in 3 years, because I had a serious neurological infection, I could barely construct a sentence let alone interpret balance sheets, cash flow statements, P&L’s, etc. My survival depended on treatments that cost 7-12k a month that my medical insurance would not cover, because they were “experimental.” I could no longer service the mortgage debt on the real estate and had no one who could help me. My partner is the greatest guy on earth but we had quite a tussel over retaining the commercial properties. He wanted to sell short – WAY short – basically zero appreciation in 15 years short. He wanted to sell to cover outstanding debts but we would have been left with a 10th of the current value of the properties. Now most debts are settled and if we are lucky we will sell for close to the appraised value, which is not chicken feed. Luckily he listened to me since he was a production person in our business and did not even log an invoice or record a check when I got sick. He was always in at the same time and out at the same time while I was on call 24/7/365. It took a lot of convincing to get him to see the value in riding out the final payoff of the buildings and to use the rent of new tenants to hold onto an asset that generates a liveable income and when sold can be converted into other income generating assets. He is without a doubt the most financially inept person I have ever met. He waits until things get to crisis mode then puts out fires. I am a crisis aversion planner and if it happens a mananger, but I was mentally and physically unable to fix this. So, we wound up selling a high end residential property we’d leveraged and luckily we were not underwater on the note but what was supposed to have returned 1,000,000 net gain in 15 years after taxes, reamining mortgage balance, etc., wound up losing 400k. Same with the business – I ran it like a Swiss watch and our best bookkeeper looked at my accounting practices and she had done all the CPA coursework and run 6 successful store in a franchise operation , and did not need to ask me more than a couple questions. We had 35 employees and that bookkeeper relocated to be near her family out of state. Then I got sick immediately after that. My partner hired someone who looked good on paper but was a con artist. And, he did not think that when he noticed our sales slipping he needed to cut staffing, increase marketing, promotion and incentives. He just let it continue to run until it was completely out of money. When you have a small business that needs 6 figures of gross revenue a month to work very quickly you can lose 100’s of thousands of dollars or millions without your eye on the ball. I am not trying to blame someone else – just to say it is imperative to have a financially competent partner when you start dealing in sums of hundreds of thousands and millions of dollars because if something happens to you, you could wind up having 7 figure losses, and be out on the street. It is easier to rebound when you are 30, or 45 or even 50, but if you develop a serious illness and you are in business with someone that does not look at wealth building and instead looks at a fistful of dollars and feels rich, you are screwed. Everything I built by spending many nights up all night brainstorming, running scenarios, adjusting figures, doing all the accounting for the business including payroll, hiring, training, and the first 3 years had no help at all, was washed away and it almost wound up causing me to split from my partner and some serious damage was done to both our business and personal realtionships. Then the bank called the remaining 35 in cash due on the end of the mortgage we did not have it. Also, we lost over 250k in cash during the perfect storm of the depression (I don’t care what economists say, we are in depression that is currently experiencing an artificial bubble), my illness and hospitalizations and expensive treatments, combined with devaluation of real estate we had 50% equity in, and a partner would had no interest in the financial operations of the business had us right on the edge of bankruptcy. As a side note we had financially performed for over 20 years in another business and this one. The debt to income ratios were not excessive. Growth was strong but not volatile. We had 50% cash equity and all documented, income verified loans (fixed interest on 15 year commercial paper which is hard to get). In other words, we were not out on a limb – the tree was cut down. Now I am 60 and looking to do a like kind exchange and leverageing some of the proceeds from a real estate sale into multiple properties but if I get 80% + of the appraised value of my property and invest it propertly it should carry me to the end. At 60, now with a chronic illness, I don’t want to sweat it if a tenant is late with rent or if property goes underwater. The property we lost 1.4M on, by having to sell it for 400k less than we had in it and not gaining the conservative 1M in profit at the end, calculated with it only appreciating 50% in 15 years crushed us. This was a property in a historically high end residential private country club community on the east coast, which was valued at completion at more than 2x the price for which we SOLD it. It went into the can. If I were not sick and 45 again I’d do it because a 20 year note would be paid when I was 65. But, I don’t want the level of stress of that situation to ever occur again and now want a modest income instead of aggressive growth because I can’t afford to lose anymore. Sometimes the perfect storm occurs and when it capsizes your boat, even when you have 50% equity and that equity becomes negative because real estate values fall below the cost of acquiring and financing a property – by 50% – you wind up having zero. Now I own my 2 commercial properties outright and for personal reasons want to sell and get out of Dodge. The thought of having well over a million dollars in debt service (11,200 a month back then because we are in a very high tax area) when I could buy half a dozen properties with cash and not make a lot of money but enough, and still have them to rent out or even sell to generate income seems a lot better decision in my case, but not in all cases. Again, had I not gotten sick, had the economy not tanked, had our gross receipts not fallen 40% and had I had someone to stop the hemorrhaging when I was non compus mentis, we may have been okay, but I know I cannot rely on by business partner and at my age don’t want to do due dilligence on finding out if another one is competent. There are so many variables in making the decision. Had I had less equity in those properties the mortgages would have been underwater and I would have been forced to sell my home and my commercial property to pay at settlement. This is an extreme case but it can and does happen and you have to make sure whoever you are in bed with is at least minimally financially competent instead of trusting someone to be because you have a relationship built on trust. Expect the best but prepare for the worst. As you said, it is a case by case decision and age, health , business relationships and market volatility and future need have to be factored in.

  2. Robert Horton

    Ali, great post. As someone who majored in Financial Management and have worked in banking, real estate and insurance, I totally agree with using leverage to finance investment properties.

    I’ve sold real estate for over 12 years now and I always notice my high net worth clients ALWAYS leverage as much as they can even on 2nd homes when I know they can easily pay cash.

    Why purchase one house for $100K when you can purchase 4 with an 80/20 loan and still leave $20K in the bank?

    On a side note, I have a friend who I help find foreclosures to purchase who has 2 cash investors. They use lines of credit from their banks to fund his purchases. They split profits but have him deduct the interest they pay on the lines of credit from the profit. What are your thoughts on this? I’m thinking he shouldn’t have to do that.

    • Mike McKinzie

      While leverage is a better return, remember, the bank wants their payment whether you collect rent or not. For a newbie investor, having to make a mortgage payment on a vacant house, with the added costs of a turnover, could be disastrous.

        • David Faulkner

          Start with purchasing your personal residence, but buy it as if it were a rental and with the plan to turn it into one. House hack (rent rooms, etc.) so you can live rent & mortgage free. Take the money you would’ve spent on those things and save it + more. There’s your cash. If it is not quite enough, you can cash out refi, so long as your new mortgage (plus expenses, plus margin for safety) is less than rental income. Rinse & repeat as necessary. After a few of these under your belt, you’ll be able to start buying pure rentals without having to house hack them anymore, then you’ll really be rolling. Ask me how I know this …

        • Mike McKinzie

          Zach, I think you misunderstood my post. Leverage is GREAT, but you MUST have a RESERVE for that mortgage payment. I always have 3 or more months of reserve mortgage payments for my mortgages, along with repair reserves. As I said before, no amount of leverage helps the return on a foreclosed house! Of course new investors can’t pay all cash, but that also shouldn’t put 100% of their money down, leaving no reserve for the future expenses. Rental houses to do not produce rent 100% of the time forever!

      • shaune hassell

        I think your on the money with that one i think i would buy my first few deals would be cash to see how this works then leverage after i have sure cash flow coming in especially if your a new investor it’s to me more risk if the tenant don’t pay and you still have a mortgage and no back up cash coming in.

        • Ali Boone

          Definitely a risk Shaune, although I would argue that if you have enough money to buy for cash first, you have enough money to cover some months of vacancies.

      • Ali Boone

        Mike, this is true, however I don’t recommend anyone buying into a mortgage situation unless they have a little in savings to cover a few months! And the cash flow should be high enough to allow the investor to build a nest egg so vacancies don’t become critical.

      • Robert Horton

        Keith, I was just saying that I don’t think you should have to deduct the “cost of funds” for your investor from the profits. It shouldn’t matter if they are using cash, bank loan, HELOC or whatever.

        If you find the deal, manage the rehab and get it sold while using their cash, then it should be a 50/50 split in profits.

    • David Faulkner

      Just ’cause they’ve been “appreciating” doesn’t mean that they will continue “appreciating”, just ask anyone who bought in 2006. Past results do NOT predict future performance. Tell me where I’m going to die, so that I may never visit that place.

      It’s all neither here nor there, though … if they cash flow, who really cares what happens to prices? Personally, if I have cash flowing properties, I hope that prices will go down in that market so that I can scoop up more of them at bargain prices, but that’s just me.

  3. Mike McKinzie

    I agree with you BUT, there are so many other factors to consider. One of the stars on Bigger Pockets, Rich Weese, said his answer to this question was to own 200 houses, 100 Free and clear and 100 leveraged to the maximum. I had a college buddy who started investing in Las Vegas in 2001 and by 2008, had 65 rentals, all of them with little or no money down. By 2010, he has LOST them all. How many THOUSANDS of man hours did he use to buy and manage those properties? The few bucks he made on rents were miniscule. Here is something else to think about. I have one mortgage with about a $155,000 balance that has a $500 a month payment. I have another mortgage with a balance of $75,000 with a payment of $1,000 a month. The first is a 30 due in 8 so I am paying it like an 8 year loan, and the second is an interest only loan. Last year, I bought with $500,000 in owner carry back at 4%, but I would not have done it if the seller wanted 10%. There is no doubt that leverage will RAISE your return, IF you can keep the house. Losing the house bites into the return pretty hard. Sure, if you put $10,000 down and the house goes up $10,000 in value, you just doubled your money. BUT, if the house goes DOWN $10,000, you just lost all your money and the bank has lost none, yet. More leverage is MORE risk. If I paid cash for a $100,000 house and it goes down $10,000, I just lost 10% of my money. But if I leveraged it at 90%, I just lost 100% of my money. So be careful with leverage!

    • Ali Boone

      But isn’t it true though Mike that there is only a loss if you try to sell it when it is down? If you aren’t trying to sell it, there is no loss. Value only matters during a sale or refi.

      How did you buddy lose the properties? What happened?

  4. The question is not to use leverage or to use cash, but when to use leverage and when to use cash.

    When you are young and starting out you should use leverage to grow your base and free up cash by utilizing the tax benifits of owning real estate. As your base grows you will “mature” in your investment style and you will turn to cash flow as your primary goal. After all why did we invest in the first place? In the final third of your life you will want money to spend, to create family memories, to take trips and to enjoy the finer things in life. I no longer care what my cash on cash return is (it is very low) or my cap rate when I purchase. All I want is cash to spend. I still own leveraged property and I still utilize appreciation to grow my wealth and increase my cash flow. But I utilize appreciation differently than when I began my career. Instead of purchasing and waiting for the value to go up, I concentrate on city”s where I can purchase below market and have forced appreciation. An example would be homes I purchased in Phoenix for cash in 2011. Zero leveage, but I have almost doubled my money since then all of the while ejoying that delicatable free flowing cash. My plan was a simple one, one anyone can follow with a little discipline and time. Buy property using safe leverage, use the tax benifits and cash flow to pay down the loans, pay off the first, the second the third and watch the snow ball grow. This may not be for everyone (its realitively boring) but it has worked for me and my family. We have created a cash flow machine for our children to enjoy and grow in their alloted time. Now it is time for us to spend money, life is good.

  5. Brandon Hall

    you point out that the only real thing at risk is your credit score, yet if your model is dependent on your credit score to obtain financing or prove your worth to private investors, that is a significant risk that should be taken into account.

    Good article, but leverage is inherently more risky than all cash. I love leverage and intend to use it indefinitely, but I also understand the risk that comes with it.

  6. This debate seems to apply to smaller market/ less demand areas. In the Northeast cities ie Boston, NYC, DC the amount put down as a downpayment is based upon attempting to positively cash flow. For instance, there are scarce properties where one can put down 20% and cash flow but if one were to put down 30% to 50% then the properties would cash flow. Great discussion, but as the price per sq ft goes up the two arguments meet somewhere in the middle.

    • Ali Boone

      True Eric, but at that point I would argue that the returns on those properties aren’t good…if that high of a down payment is required to cash flow. If you calculate the cash-on-cash of those, it won’t be very high!

  7. Darryl S.

    The craziest thing happened several years ago to me that I want to relate. We had a mortgage burning party for our principal residence. I walked out the next day into the yard barefoot and I swear the grass felt completely different from just the day before when it was partially owned by the bank. Same crazy thing happens when I buy a rental property for all cash. Not sure how to explain it.. We do occasionally use leverage on a rental property or a flip property but it is a big priority to pay that off as quickly as possible. Part of the KISS system that we invest by.

    • Ali Boone

      Haha, I love it Darryl! Peace of mind and good feeling is, to me, the best argument for anything that anyone can give. I don’t care if someone even buys a bad investment, as long as they are feeling good about it. Even the best investment isn’t worth it if you don’t feel good about it. Ha… I love the grass feeling.

  8. John Thedford

    Thanks for the article. The debate will never end:) I do both: pay cash on some and leverage others. If I had endless supplies of cash I would probably pay cash. The leveraged properties give me a better return BUT…not having enormous amounts of debt allows me to sleep well at night. Any way you do it, if you are investing wisely, it’s all good!

  9. Charles Williams

    Tremendous article Ali. I am a firm believer in leveraging. I think it all boils down to what each individual investor is comfortable with. Sure I would love to be able to pay all cash, but who has that much money when starting out, and how big do you want to grow your portfolio. It would take a HUGE amount of cash to get big. Our goal is to acquire 70 properties. My partner and I definitely would not have been able to acquire 10 properties over 2 years paying all cash. Here in Virginia the city where we invest, this is the model we have been using. We buy properties about 30% of their value and rehab them up very nice somewhere between 50-70% of their value. We cash flow $300-400 each month per property. Our properties are very nice and we take care of our tenants and properties. So far we haven’t had any issues with keeping them rented. This model has been working great for us and we are positioning ourselves now to start adding more properties again in the near future.
    Now to do the risk portion. At first taking on all this debt did bother me, but the further we go and the harder we work the more comfortable I am with it. My tenants are doing a great job at paying it down for me!! We have been able to buy all of our properties in our LLC. I will tell you this though. We have more at risk than just the down payment. Not only is the LLC at risk for borrowing the money but both my partner and I have to personally guarantee each loan. So with that being said, we really have to make sure we buy right and stay on top of running our business. It just makes us work harder to make this thing a success. All in all we cash flow very well each month, we own over a million dollars worth of property, and we owe less than one half million dollars. So far at least for me I sleep very well at night using leverage.

    • Ali Boone

      Love it, Charles! Great information, thanks for sharing. Out of curiosity, what kinds of loans are those that you got for the LLC? With the personal guarantee part it sounds like a mortgage? Are those recourse or non-recourse loans to the LLC?

  10. Jeff S.

    Ali, in my state of Oregon the trust deeds for investors are different than for homeowners. It is typical to not have the possibility of deficiency judgments with owner occ but the law requires them on the trust deeds used on investment properties. If that is true in my state it could be true in yours too.

    IMO most people leverage because they have no choice.

    • Ali Boone

      Jeff, are trust deeds required for all properties? Or maybe I’m just thinking of trust deeds in terms of like a land trust…?

      I don’t think that’s true. I think it can certainly be the case for a lot of people, but a lot of people strategically leverage, regardless of their capability for paying all cash.

  11. margaret smith on

    Don’t forget to consider private lenders/hard money as a resource if you are not interested in going through all the misery of a bank loan, or if you credit is damaged, or one of the many bank no-no’s applies to you. I lend outside the “bank box”, and have recently started to lend 50% loan-to-value against an existing investment property my client owns free and clear, 5 year balloon, 10-12%, and he/she take the money to the tax deed sale, or whatever- is ready to pounce on a good buy on another property. Now my client has two cash-producing properties.
    I have also been all the $$ behind a property purchase on a really good deal (equity in the deal already, due to the super all-cash (my cash!) buy my client negotiated). I pay 100% purchase price and closing- he pays for the light rehab to get the house in excellent rental condition. He manages the property. He pays”interest only” each month- has good cash flow after paying me and taxes, insurance, maintenance- and we split the profit upon sale in 5 years or less. We can do this MANY times over!
    Unlike a bank- I am an actual person. Buyer and lender can talk face-to-face if something goes wrong, and keep a win/win attitude, creatively renegotiate the deal as needed. Have I done this? You bet! My clients love me, and I am grateful to have them around for a long term relationship. Take the long view!

  12. Kevin Vincent

    I personally believe in Cash flow as being the most important thing in Rental Property portfolio and thus leveraging is a natural choice for me. Appreciation is secondary and thus I am able to ride the fluctuations in the market.
    My strategy is to purchase around 5 units (SFHs to Quads). I use hard money and then force appreciation (minimal because of the market I’m in – Jacksonville, FL). Once I have them stabilized (usually a year) I refinance them with a portfolio loan to lower the interest rate
    In this way my properties are always positive with cash flow and I’m able to freely invest in more properties.

    BTW all my properties have a 20+ cap rate.

  13. tarik larue

    Great article Ali. I love how some of the investors argue against leverage but then state that they use it themselves. I mostly buy $30,000 foreclosures in C class areas. The properties can ONLY go up in value especially after I upgrade them. By pulling cash out I can buy 2 more every 6 months rather than one or two yearly. I also use HML and private lenders for the repair costs so it’s a way to quickly pay off the lenders. I could always apply the cash flow to pay down the mortgage and own it free and clear faster.

  14. If people would simply and quickly walk away from an investment I’d agree that the most people have to risk using leverage is their credit score (leaving aside any comments about it being easier to pay taxes and insurance than PITI). However, most people will do everything they can to salvage a bad investment. Looking at it from a distance its easy to say you should simply walk away, but it isn’t that easy when you are actually in the middle of it. People tend to be overly optimistic and there is an element of ego involved also. Walking away is complete surrender and acknowledging the fact that you were wrong in your investment decisions (this is especially poignant if you have bragged about them) is a very hard pill to swallow. It is often easier to keep throwing money at a bad investment than to simply walk away.
    Bottomline- you are basically disregarding human nature.

    • Ali Boone

      Human nature definitely plays a role, Cal. And you’re right, a lot of times investors will keep tossing money instead of walking away. The trick there is to buy smart in the beginning so the chances of a property going bunk are lessened.

  15. maggie smith

    Please, NEVER go into the responsibility of an investment with the fall back “plan” of just walking away. I know plenty of investors who were seriously over-leveraged in the 2008 bank recession (which hit investors first, BTW)- and who have never been able to return to the business of investing since. Credit, business model, reputation, ego, whole future is jeopardized when this happens. Example: One of the beloved, seasoned board members of our local REIA took a job selling shoes at a discount store- He (and his wife) could not look at his former cronies in the face as they became his “new clients” in the shoe dept.

    Banks have no face, no flexibility, no heart. At least in dealing with a carefully vetted, local hard money lender, with plenty of integrity and no hidden agenda to acquire your property when you stumble, you both have a good chance of adjusting until the storm settles. Find that person!!!!

    • Ali Boone

      All true Maggie! Hard money though doesn’t work for all though because they are short-term loans. For the longer buy-and-holds I don’t know of any hard money that has worked for those?

      The over-leveraging in 2008- what caused the demise of those investors? Did they offload the properties just because they went underwater?

      • maggie smith

        Ali, in 2008-when the banks died, the housing industry, and all who made a living off it, took an immediate dive. Here is SW Florida, people who worked the trades, even realtors, mortgage brokers, other investors- left their homes in droves- often overnight and without notice-leaving landlords with no tenants, no income- but plenty of mortgage payments and holding costs. Properties that were mortgaged had to be subsidized by the owner/investors- who often lost houses in multiples to the banks. This took years to recover from, and many investors just left real estate forever. Now some are sheepishly coming back- often as cash buyers only.

  16. Really great insight, Ali. I think a large part of whether you invest or pay cash depends on your personal situation. For new investors, I think cash is the better option until they get the hang of things.

  17. Patrick Smith

    Great article, I never get tired of the argument regarding cash or leverage (or some hybrid).

    In terms of personal situation, say you’re a newbie and you have around 1.5 mil to work with.

    What would you do? Where would you start?

    • Ali Boone

      Great question Patrick. I think the answer depends on a multitude of things. What are you ultimate goals with investing? Do you want maximum passive income? Then I’d say leverage all $1.5mil into various investments (of which depend again on what you want because there are a lot of options for what to buy). If you want to max out overall profits, maybe stay active with it and do things like flip and such. Completely depends.

  18. Matt R.

    Oh boy, I have never heard more leverage equals less risk. Ask anyone who leveraged last recession. Sure leverage can help with gains but it is a two way street. Using the above example with the 5 properties vs one cash buy – the same 5 properties could go south by $15,000 each and now you are down 75k vs just 15k for the cash buyer. I only use leverage because I have to. It is definitely riskier. Walking away from a bank loan is more than a ding on your credit…you will never get a low interest bank loan again and you will forever be stuck paying highest interest costing many many thousands of dollars more in your lifetime. I also never heard of anyone losing 100% equity on a 100% cash buy. Maybe if you don’t pay property taxes I guess.

    • Ali Boone

      Matt… I’d say you’re only right about being down $75k though if you sell those properties. Anyone who bottomed out during the recession, in terms of equity, only did so if they tried to sell. Value of a property is meaningless if you aren’t trying to sell or refi, no? Then I would argue too that it wouldn’t matter if you couldn’t get a low interest bank loan again if you are paying cash in the first place, no?

  19. Matt R.

    Leveraging = more risk…not less
    Using the above example;
    The 5 properties go down 15k each equals minus 75k equity vs one cash property at minus 15k.

    Walking away from a bank loan is a bit more a than ding on your credit. Ask anyone who did that last recession. You will never a get a bank loan again and forced to pay double or triple interest rates the rest of your life. That is if you could even get another loan.

    I have never heard of all cash purchased property losing 100% equity. I have heard of leveraged folks losing it all though. Leverage is a two way street. Look both ways before crossing.

  20. Darren Sager

    In rising and competitive markets, like we have here in the NYC area, cash is king. The reason behind that is because if you’re using financing the appraisal numbers aren’t keeping pace with the rising prices. The appraisals are months behind the actual numbers. So those trying to finance are having to either renegotiate with the seller or come up with more cash at closing therefore reducing the overall return. This doesn’t lead to a pleasant buying or selling experience for either party. We aren’t seeing the cash discounts like before but still it offers the best leverage to actually getting the deal done.

    • Ali Boone

      Great put Darren. And yes, there is a whole other aspect to financing I didn’t mention- the PITA (not to be confused with PITI, lol) factor. Traditional mortgages take the cake for difficulty! Appraisals rank up there too for being a major issue in a lot of markets.

  21. Presley Reeves

    Your money is at risk either way. It is just what type of risk are exposed to, and what is the risk mitigation strategy? For example, if my money is 100% in a federal insured bank deposit account, which many believe is one of the “safest” places to have your money, it is still at risk. Inflation (depreciation of the dollar), taxes, theft, and the end of the world as we know it, nuclear war etc., are still risks. Those risks are mitigated by the strength of the U.S. government, the federal insurance of the money on deposit, and the physical security that the bank puts in place to safeguard the deposits.

    I believe that prudent use of leverage produces better long term wealth building potential. That is simple math. However, if one needs current income a cash buy does that. Both investors are still exposed to risk–just different types of risk; and each needs different mitigation strategies to manage it.

  22. Keith Weinhold

    If an investment could never go up in value, but could only go down, how much of it would I want?


    That investment that can never go up in value but can only go down is…drum roll…real estate equity.

    I leverage every domestic property, only paying cash for offshore buys where loans are difficult to obtain.

    Once one identifies the right market and the right property manager in order to secure a positively cash-flowing income stream, use leverage.

    Another nice column, Ali Boone!

    • Ali Boone

      Thanks Keith! I always value your thoughts as I know enough about your portfolio to be super-impressed but more so, I would trade shoes with you any day in terms of investment portfolio (figuratively speaking) so therefore, I’ll always take your advice and value your thoughts!

  23. Definitely a tough issue Ali!

    I do agree — there’s no right answer; only the answer that works for each individual.

    Interesting to read the responses; thanks for keeping us all entertained! 🙂

  24. Ying B.

    I see it as follows:

    Cash scenario:

    Asking price on REO is 189K
    Cash Offer $120K (accepted)
    Annual Rent Net Income = $13000 after expenses such as property tax, vacancy, HOA, etc.
    In my mind, I am netting $13000/year. In 10 years, $130K net. That’s 130K return on 120K investment = over 108%, not bad.

    Leverage scenario:
    Asking price on REO is 189K
    Loan Offer $120K with 20K down and borrow 100K
    Annual Rent Net Income = $13000 – $6000 (mortgage payment) = $7000
    What I don’t like about mortgage interest is it is front loading and for the first X number of years you primarily pay interest (not principal).
    In 10 years, you net 70K. That’s 58% ROI.

    I don’t do cash on cash or cap rate calculations and I have not read enough about these concepts and do not find them totally necessary for myself.

    I can go on to other deals as just one 100% cash deal does not take away my ability to do other cash deals as I have cash to do additional deals.

  25. I am saving up for my first rental property to pay cash. I feel a lot less risk involved when I own it out right and don’t lose sleep about making the mortgage payment. If you have 5 properties vs. 1 property. I feel if you take out a $80k loan on a 100k property with $1000 monthly rent you have to pay $400 for your mortgage, save at least $100 for repairs, $120 for property taxes, $80 for insurance, and save $150 a month for vacancies. That leaves you with about $150 in cash flow. That seems like a low bottom line for the risk of having to make that payment yourself and possibly losing the property to foreclosure. Mind you this is without any huge fixes such as furnace, roof, or appliances. I still just feel like having a bunch of properties you do not own looks sexy, but in the end your walking a tight rope. I am not starting an argument, just my view. Maybe someone can sway me. I think owning 5 properties and taking home 700-800 bucks a month and only having to worry about one roof to repair is less headache and work for the money. Just playing the devils advocate here.

    • Ali Boone

      All good points, Bryce, and it’s really just about comfort levels. There are pros and cons to both ways. Yes you don’t make as much in cash flow but you also didn’t have to put but 1/5th of the money in, so the math works out that you make more with leveraging. And yes one roof is great, but I get more comfort knowing that if I have a vacancy in one house, the cash flow from another will make up for it. But those are just counter points to yours….there is no wrong way to do it. Trade-offs going both ways, and pros/cons both ways!

  26. Please correct me if I’m wrong but I believe a personal home should be paid for in cash if possible as you are not generating passive income from it vs a rental property/commercial property/NNN lease should be financed to take advantage of leverage and have the monthly payments cover the mortgage. However, if someone were to finance a personal home and use the rest of the money to invest in something that generates more return than mortgage, they can do it but what’s the point in taking that risk for 3-4% difference between mortgage and the return from other investment (assuming it’s good).

  27. Lyle Gentry on

    I am in the process of saving up cash to purchase my first rental property and I was wondering if there might be any advantage to “splitting the difference”. If one extreme is pay 100% cash and finance 0% while the other extreme is to put down 20% and finance 80% what if I were to put down 60% and finance the the other 40%. I would still be using leverage, just not as much.

    Or would this strategy just end up giving me the worst of both worlds?

    • Ali Boone

      Haha, no I don’t think so Lyle. I’d think of it more as balancing the best of both worlds. Getting the comfort of not being fully leveraged and still taking advantage of the ability to leverage.

      There’s really no wrong way to buy a property, unless you just aren’t being smart about however you do it.

  28. We require cash on a monthly basis to live. Determining which is best, “Mail box money” vs equity build may be age dependent. Do you want to be servicing debt or spending cash during retirement? I find it interesting to look at cash on cash returns when comparing a cash vs a leveraged purchase.

  29. Brett Hennessy

    Great read Ali, thank you.

    I have two SFH’s with mortgages and two without. It is a nice safety net to have the cash flow from the two without mortgages to balance any potential vacancies or major repairs. Right now my strategy is to leverage a 3-6 more SFH’s, until the banks don’t want to play, then use the combined cash flow to continue buying in cash.

    • Ali Boone

      I love that plan Brett! It sounds like you’ve set yourself up to take advantage of the perks of each- leveraging and paying cash- and also you are then using them to play off each other in order to invest more. Sounds just about genius to me! 🙂

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