Not All Cash Flow is Created Equal: The Simple Truth a Conversation With My Son Taught Me


When it comes to strategically investing to build wealth and positive cash flow, my buddy Jeff Brown has the right idea. He always says you want to develop as much positive cash flow as you can, as quickly as you can, and to have as much of that tax-free or tax-deferred as possible, especially by retirement age.

My youngest son recently asked me, “So dad, what is your retirement going to look like, and would you ever consider moving out to the West coast like me?” We proceeded to talk about my properties, notes, businesses, and other investments that I have going on, and then we started to really dig deeper and compare things.

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Properties vs. Notes

I was telling my son about working on my taxes, all the deductions I’m adding up, like repairs and maintenance. When I started describing all the things that I’m going through, liquidating one of my properties that’s been in the family since 1964, he said to me, “Hey dad, not all cash flow is created equal.”

Of course, I hate to tell my twenty-five year old that he’s right or that he’s brilliant or anything. After thinking about it, though, I realized that he is right.

Here I am selling my property, and I’m doing all sorts of repairs, from radon, old termite damage, home inspections repairs and concrete, to miscellaneous items for the Township (U&O). With notes, there usually aren’t repairs, unless of course you have to take a property back. He was right; all cash flow isn’t created equal.

The Aggravation Factor

What I think he was referring to was the aggravation factor.

I’ve made good money off of my properties and other investments, but how hard was it to earn that money? It just seems that more and more people have their hands in my pockets.

Related: Cash Flow vs. Appreciation: What Experienced Investors Know About the Debate That You Don’t

Since I’ve owned properties for so long and even have some paid off, some of these properties start to lose their luster. Even with no mortgage, it’s as if just one expense left the picture. With increases in taxes and increases in insurance, as well as rising maintenance costs, it’s still a management intensive type of investment for me.

As time marches on, you’re decreasing your deductions from your mortgage interest and decreasing the amount of depreciation you can take as time marches on.

So, Junior and I started talking asking each other what we would rather have: a paid-off property or a note. After doing both for many, many years, the funny thing is that we both kept coming up with the same answer: We’d rather have a note.

Owning notes seems to involve much less aggravation, time, and work than properties, even if the cash flow is identical.

Our conversation covered questions like the following:

  • Would you rather have a house that cash flows $300 a month or a $300-a-month cash flowing note?
  • Would you rather have a $600 month cash flow with no mortgage on a house or two $300-a-month cash flowing notes?

Although we both kept coming back to notes, I’m sure there are other cash-flowing investments that involve much less work, too. Maybe it’s an annuity or insurance contract, or perhaps it’s a dividend stock or municipal bold.

Related: 5 Reasons Your Rental Property Is Not Cash Flowing

For me, anytime that I can buy a note at a discount with a high yield and collateral backed by real estate, it’s pretty tough to beat.

Although I don’t mind owning real estate while I have earned income, largely because I can offset the tax on the income with depreciation and mortgage interest deductions, but once my earned income stops, notes may make more sense than properties. When I retire, maybe I will move to the West coast, too.

So, what type of cash flow do you like the best?

Let’s talk in the comments section below!

About Author

Dave Van Horn

Dave Van Horn is President at PPR The Note Co. - an operating entity that manages several funds that buy/sell/hold residential mortgages, both performing and delinquent. Dave has been in the Real Estate business for 25 years, starting out as a Realtor and contractor and moving onto everything from fix and flips to Raising Private Money.


  1. Mike McKinzie

    Well, back to the same wonderful discussion, Appreciation vs. Cash Flow. If we take my investments for example, 1/3 of my collected rent goes to Property Taxes, Insurance, Management and Repairs. Another 5-10% for miscellaneous such as vacancies, legal, utilities, etc… and that leaves me with 55-60% of collected rent as cash flow. Most of my properties are paid off, so mortgages are off the table. So lets say I have a $100,000 property that rents for $800 a month (I paid $40,000 for it). It nets me around $500 a month. If I sold the property with 20% down and carried $80,000 for 30 years at 5%, I get $429 a month and have $20,000 in cash. So my “Aggravation Factor” is making me $70 a month in cash flow, this year. In 10 years, I am collecting $1,200 a month and the house is worth $180,000. And my note is still paying me $429 a month. A note is paying you a FIXED amount of income, and with depreciating dollars and there is NOTHING you can do to raise the income. On the other hand, if you carry a lot of notes, they pay off sporadically and you can redeploy that capital into a better return. My uncle is currently carrying 28 notes and makes over half a million a year. And while that sounds good, he was making the same amount TEN YEARS AGO. His main problem was that when he first started, 10% notes were common, but now he is loaning at 5-6%, OUCH! I think having some notes is fine, just remember, a note that is paying $400 today will also be paying $400 in the year 2045, (unless it gets paid off). Cash flow creates INCOME, Appreciation creates WEALTH!

      • Mike McKinzie

        Guyoz, inflation is the exact reason I was saying that note income 20 or 30 years from now is worth less than it is today. Real estate WILL go up in value, over the long term. There will be down times during bubbles, recessions and economic contractions, but ask anyone today if they wish they had bought a house in 1950 nearly anywhere, and you would get an affirmative answer. The caveat being certain areas that, for some strange reason, will never return.

    • Dave Van Horn

      Hi Mike,

      Thanks for chiming in.

      I see your viewpoint, especially because I was on the exact same path to financial freedom. Over the years though, I’ve found that notes not only create income from cashflow but also wealth not so much with appreciation but with portfolio growth, entirely in a passive manner.

      Einstein once said compound interest is the 8th wonder of the world and I can’t help but agree. Say instead of buying that $100K house and paying it off early (and I’m not factoring in what you’re spending in interest on the loan) you used that same $100K to invest in notes.

      Take an average re-performing note for example: a $20K re-performing note with a $300/month modified payment. That’s $3,600 a year in cashflow. With $100K you could buy 5 of these notes, netting $1500/month or $18K a year in cashflow. So if you didn’t touch that money by month 13, you have made $19.5K, approximately enough for another note. So now you have 6 notes that give you $19,800 after the 2nd year. Let’s keep going with this theory, approximately.

      Year 3: 7 notes, $2,100/month or $25,200/year in cashflow
      Year 4: 8 notes, $28,800/year in cashflow
      Year 5: 9 notes, $32,400/year in cashflow

      At this rate here’s how it would look by:

      Year 10: 21 notes, $82K/year in cashflow
      Year 15: 48 notes, $175,600/year in cashflow
      Year 20: 109 notes, $399,200/year in cashflow
      Year 25: 249 notes, $907,600/year in cashflow
      Year 30: 570 notes. Cash Flow: $2,058,400/year or $171K/month

      So by year 30, instead of owning a home free and clear, that has appreciated by 5% (the national average) and rents for roughly $1000/month +4% inflation, you now have a valuable portfolio of 570 notes, netting you $171K/month or over $2 million a year. Now I might not have an appreciation on any one note without modifying them again (which can be done), but this portfolio only grows and can be easily liquidated and borrowed against as well.

      The most important about all of this isn’t how high the income is, it’s how much active work am I doing to earn that $171K/month? The answer is I still get 12 monthly statements from my servicer a year and my workload hasn’t increased whatsoever. Now of course this is just in theory, I’m not factoring in the servicing fees (which are minimal), the early cashouts (which are fairly common with the average person staying in their loan for only 5 to 10 years, which only juices up this exponential growth) or the availability of product.

      But at the end of the day what my article was really trying to say, wasn’t that notes are better than real estate, it even wasn’t about cashflow vs. appreciation, it was about building wealth with ease. When I’m fully retired and in my old age I don’t want to deal with tenants in my paid off properties and I know my son doesn’t want to either. I’d rather pass on a large portfolio of cashflowing notes that builds wealth both by creating passive income and compound growth.


      I do this with institutional notes because I find more reliable sources for them, they longer terms and good rates, but this theory can be employed for hard money loans/notes as well.

        • Joe Foster

          MikeM, was thinking the same thing, if you are living off of the income it is difficult to re-invest. We have to compare re-invested rental also, which would have a similar return purchasing new properties periodically.

          As an investor that has both notes and rentals, the returns on rentals exceed the returns on private lending in my portfolio, even paying property management. However, I still get calls, the HVAC broke, the water heater is leaking and then, the repeat call that the vendor broke something else while performing the first repair and the bickering with the PM to handle this… emotion and attitude added to stress the point.

          In my portfolio, the largest problem is our mutual uncle Sam. As a later poster mentions and needs emphasized, once you are succeeding in these investments, the notes should be in non taxable or tax deferred vehicles. While the rental taxable to take full advantage of depreciation , deductions and exchanges. This should be considered in your planing, that is, if your investable assets are outside of a tax favored account, how to move more to tax favored and invest the notes there, otherwise you wake up April 15 and find you are paying over 50% of what your returns in some form of fed/state/fica tax.

          Summarizing, Mike and Dave are correct! The implementation is everything and much depends on your level of involvement, your goals and tax bracket. It all takes planing, understanding and desire.


        • Dave Van Horn

          Hi Mike,

          I understand your concern, I live off a portion of my note/real estate income and there was a point where reinvestment did prove difficult in the beginning. But for those who don’t have $100K in disposable or retirement capital available, the theory in the example I gave above can still hold true while addressing the issue you just raised. The strategy here being leverage.

          What if I told you, you could still buy that $100K property, collect the cashflow, have the depreciation/write offs, and use that house to help you build an ever growing note portfolio? When I started purchasing property, after exhausting all my traditional financing options, I began borrowing private money. This is where I learned about leverage. Seeing how my private money lender made a profit (with little aggravation), I started to become one myself, creating notes for others in the business to help them purchase properties. I first did this with my retirement capital but then realized I had an untapped resource in my pocket all along, the equity in my real estate portfolio.

          Utilizing HELOCs, I started borrowing out against my properties for 4% to 5% and lending out that money for real estate deals at 15% to 18% plus 3 to 6 points (averaging a 16% to 24% return). These notes were secured by the property I was lending on, meaning if the investor defaulted on their note I could foreclose on the property making these loans very safe. I still do some of these loans today, but have upgraded the practice to fit the institutional note space.

          With institutional notes, I found I could do the same thing only now I’m finding more consistent product, longer terms, and higher yields. Then on top of it all, I could leverage and re-leverage my notes to purchase more investments as well by borrowing against them utilizing a Collateral Assignment of Note and Mortgage.

          So employing the arbitrage above, you could now have two investments (the house and the notes) instead of just one. You can collect the cashflow from the rent, use the income from the notes you purchased to pay off the refinance loan/original mortgage, collect some of it as additional profit, and/or use that additional money to reinvest creating an exponential return.

          Keep in mind the purpose of the article was to talk about the options you have in retirement. If you were to continue utilizing leverage to purchase notes, by the time you hit retirement age, you would also have an additional option than most hard property investors don’t have: if you wanted/needed to sell your properties (either to downsize your portfolio/management obligations or to capitalize on appreciation) you can and still maintain significant cashflow from your expanding note portfolio.

          Glad to keep this conversation going.


      • Bill B.

        Thank you for this post. It brings up something I’ve been wrestling with.
        I’m a fifty something newbie. (better late than never, I hope……..)
        There is a multi-million dollar elephant in the room that is neither appreciation or cash flow. Mike addressed a lot of things that surround this point, but did not address it specifically.
        The KEY issue I want to address is that after thirty years, the notes run out and the income stops. With buy and hold investing, the rents (and headaches, and increasing rents) keep going in perpetuity.
        If the aim is legacy wealth, buy and hold presents that with a deed that stands for centuries or until civilization collapses. With notes, each month the window in which you receive income shrinks.
        In the situation of a twenty-something that planned well and executed well and is earning $171,000 a month in their fifties, the solution is quite easy: live off of the even numbered months income and continue to purchase more notes with the odd numbered months proceeds. (the “horror” of having to work a couple hours every other month to purchase additional notes………where do I sign up?????)
        This issue (for late bloomers like me) means that our lives become “proof of concept” for our children, and that our children then build the legacy wealth for our grandchildren and beyond. I guess that is true for late blooming buy and hold investors as well. But the limited life of a note vs the permanent control of a buy and hold asset is rarely if ever discussed and is a very important issue if the goal is legacy wealth.

        • Dave Van Horn

          Hi Bill,
          Thank you for your comment, and welcome to RE investing!
          Regarding a legacy plan, taxation and heirs aren’t the only consideration; there’s also the preference and skill set of the heirs. For example, in my case, my wife would rather manage notes than properties, and my son, who could manage them, recently moved 3,000 miles away.
          Keep in mind, although most loans are originated for 30 years, statistically, the average mortgage in the united states only lasts about 5-10 years due to the fact that people move, refinance, sell, etc. The interest is all front-loaded, so more of the monthly payments are usually interest.
          But, back when I worked as a financial planner, we found that most legacy wealth ceases to exist past two generations. I suppose the most important part is working with your heirs to teach them how to invest and hope that they pass on the lesson.
          All the best,

    • Mike McKinzie

      John, THOUSANDS of people sell their notes at a discount DAILY. All those commercials you see from JG Wentworth, Peachtree, etc… offering to buy instruments that make payments over time, such as annuities, lawsuit settlements, notes, etc…. for example, Grandma Jones sells her house for $100,000 and carries a note for $80,000 because she likes the monthly income. Five years later, she passes away and has 10 heirs, all with equal shares. The note has a face value of $77,000 now. If the note was paying $450, the heirs don’t want $45 a month, it wouldn’t change anything. So they decide to sell the note. They try to sell it at face value, but NO ONE will buy it because they can get a better return elsewhere. So the heirs discount the note and ask $70,000 for it. Maybe they sell it and maybe they don’t. The return is still not all that great but at $60,000, they have plenty of buyers. There is a myriad of reasons that notes are sold at a discount, very much like the Bond Market, except with private payers and usually private payees (sometimes banks do sell notes too). The note market is actually quite large! But again, the $450 today will be the same $450 25 years from now, the year 2040. I don’t think $450 will buy in 2045 what it can buy today, maybe a tank of gas then!

  2. David Oldenburg

    Great article on cash flow and NOTES. I am a real estate investor, RE Broker, flipper, private money lender, and a whole bunch of other things in real estate. I would almost always hold a NOTE, rather than be the investor.

    Here is a perfect example. A year ago some flippers I know found the “perfect” property. They negotiated for weeks to get the right price, spent months dealing with one problem after another, and finally got the property ready to sell. Guess what? The market is now weaker than it was a year ago, the home is not selling for what they want, and they have had to lower to the point, they are going to lose all profit after they pay me the first mortgage with i.nterest.

    How did I fair? I loaned 80% of the before rehab value. My interest and points over the last year has been almost $40,000. I spent no time looking for the “perfect” property, I spent no time negotiating the deal, I spent no time dealing with all the rehab problems, etc… I also spent no time listing the property, lowering the price, worrying about losing my downpayment etc… They lost their rehab money and their downpayment, and I made $40,000.

    Now, not every loan works out perfectly, but I would always rather carry the NOTE, than be the one flipping or renting properties as a landlord.

    • Mike McKinzie

      David, while anecdotal evidence can show almost prove any argument, there are flips that make the hard money lender look like the loser too! We are talking long term. A note requires no tenants, no monthly rent collection, no repairs and is easy money. But every multi millionaire I know in real estate got there because of appreciation. Something else I have not heard yet, how much repair work has to be done on a foreclosed note! If you think a tenant is rough on a property, you should see what a foreclosed owner can do!!

      • David Oldenburg


        Yes, I am aware of how much damage an upset property owner can do! You bring up a valid point about building real wealth, and how it is easier with some of the potentially bigger returns the flipper can make. I recently did flip a home for a 20% return in 45 days, so I know what you mean. I just choose to only flip the really good deals, and loan on the ones where I want someone else to take all the risk. I also do a lot of really short bridge type loans, which allow my yields annually to be much higher, because points are charged on each one. Making 20% per year this way, is relatively easy and offers reduced risk if your LTV’s are lower. Good luck with what you are doing!

    • David Oldenburg

      Lance, You have to be really careful buying NOTES. I have found that NOTES are sometimes like cars, and people want to sell them when something is wrong! To answer your question, post in places like Bigger Pockets in the marketplace. Tell people what kind of NOTES you are looking to buy. Here are some rules I follow…

      1) Is the NOTE performing and for how long? Get documentation to support that the NOTE is being paid, paid on time, and the age of the NOTE. In other words, how long has the borrower been paying on the NOTE?

      2) How much equity / protection do you have? This is a very subjective area, because knowing what someone will pay for a home before it is listed for sale, takes a lot of experience. Find 2-3 Realtors who really know the area well, and who you believe will be honest about comps and value. Look at other listings and recently sold homes to get your own idea. Be sure to factor in all costs to sell, including any unpaid taxes, RE commissions, closing costs etc….

      3) Does this NOTE meet your investment objectives? I will only loan or buy NOTES on residential property, located close enough to me that I can drive to the property. I want to be able to see the property and talk to the NOTE payer directly if needed.

      There is so much more that you need to learn, but just be careful! I would rather buy an 8% NOTE that pays on time, and I get all my money back, then an 11% or 12% NOTE that has a great yield, but a sketchy situation 🙂

      There are so many great articles and other NOTE professionals here on the site, so ask questions, read posts, and get educated before you make any decisions.

    • Dave Van Horn

      Hi Lance,

      Note buying is really a relationship based business, and knowing your note seller is key. Local and non-local networking events for real estate investing, distressed debt, and the banking industry can be important gateways into the note buying community. Some websites, such as LinkedIn and Bigger Pockets offer groups dedicated to note investing, while others like Meetup integrate both online and local networking to connect those interested in note investing.

      But a more specific answer to your question about where to buy notes is online, brokers, and loan exchanges/specialty servicers. Some examples are and I’ve also personally stated a Distressed 2nd Mortgages Group on LinkedIn, where note buyers can buy from other investors. My company ( also offers both 1st and 2nd mortgages for sale.

      Figuring out whether you’re looking for a more passive or active note investment may be your first step to determining whether or not you’re interested in performing or non-performing notes.

      If you want to shoot me a direct message, I do have other resources I can offer someone new in the notes business as well.

      I hope some of this info helps!

  3. JP Hill

    I think I’ve learned as much from the discussion as from the article. It’s great to be able observe the contrasting viewpoints in a respectful format. Thanks to Dave for sparking discussion with your article and the BP members for participating.

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